Editor’s note: This is the second article in a three-part series about the three stages of divorce. Part one is I’m a Financial Adviser Who’s Been Through Divorce: This Is How I Break It Down for Clients. Part three will cover the finalization of a divorce.
In this series, we are looking at three stages of divorce. The first part of our series (link above) explained how to prepare for divorce once you’ve finally made the big decision.
You then needed to understand your household expenses, gather the necessary financial documents and consider your children’s expenses.
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So, if you made it through stage one, well done.
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Welcome to Stage Two: Negotiation
With your documents in order, you’re now armed with the knowledge and tools you need to start making smart decisions about your future.
You’re entering this next phase with confidence. You have the facts and power necessary to shape the life you want to live.
And while we all have those visions of couples fighting it out across the conference room table, this stage doesn’t have to be that. Think of this stage more like structured problem-solving — figuring out how to divide responsibilities, assets and next steps so everyone can move forward.
Yes, there may be tough conversations, but there’s also room for compromise, creativity and collaboration.
With the right mindset (and support system), the negotiations can be less about conflict and more about building the framework for your new chapter.
So, let’s do this.
1. Choose your legal path
One of the first — and most important — decisions you’ll make is choosing the right legal path.
You basically have three choices:
Mediation. If your divorce is straightforward, with minimal contention and marital assets, mediation may be the way to go. You, your spouse and a mediator basically talk it all out. It may be less stressful and will probably be a lot cheaper than hiring attorneys.
Litigation. Unfortunately, though, divorce is not often clean and simple. So, if cooperation breaks down or the issues are too complicated to resolve outside of court, you will need to hire an attorney and possibly litigate your divorce. Litigation basically means you will need the courts to settle your disagreement.
Sadly, here you may be fighting it out. But you need to protect yourself. Just know that, when you hire an attorney, you’ll need to provide an upfront retainer, which they’ll use against an hourly fee.
Collaborative divorce. In recent years, collaborative divorce has been gaining popularity. Here, you have a team of experts to handle legal and mental health issues, financial decisions and more.
Like mediation, collaborative divorce is best suited to couples who are divorcing on relatively amicable terms. But with this method, you are working it out with your team of lawyers, therapists, financial advisers, etc.
2. File legal paperwork
Granted, there will be a lot of paperwork, but one of the most important documents you will need to fill out is the financial affidavit (the document has different names depending on the state).
It’s basically a budget on steroids. It shows what you earn, how you spend, what you own and how much you owe.
Both you and your spouse fill one out, so the judge (and the mediators/lawyers) have a full picture from both sides.
Depending on your state, the form may ask you to first report your budget as a married couple and then as a single person.
Trying to calculate what it will cost to live as a single person can be difficult since you may not know where you’re going to live (i.e., rent or pay a mortgage).
A financial adviser can help here — and unlike attorneys, might not charge an hourly fee, so you won’t have to worry about watching the clock.
The good news is that you have already gathered all your financial documents in stage one.
3. Divide assets and debts
Dividing assets in a divorce isn’t just about splitting things in half — it’s almost more important to think about the surrounding implications, such as tax consequences, liquidity and long-term growth potential.
A savings account and a 401(k) might have the same balance on paper, but once taxes come into play, they’re two very different accounts. Withdrawing from a savings account is basically a tax-free event.
Withdrawing from a 401(k), especially if you are under age 59½, may mean taxes and an early withdrawal penalty on the balance withdrawn. (There is a one-time opportunity to avoid that early-withdrawal penalty if you are the spouse receiving the QDRO. Talk to your financial adviser.)
The family home always becomes another big decision: Keeping it can feel comforting, but you should realistically consider the costs and mortgage responsibility.
And remember, removing a spouse’s name from the deed may change the ownership, but it does not necessarily change mortgage responsibility.
Done wrong, this can leave one spouse with all the risk and none of the benefit.
Again, it’s a good idea to speak with a financial adviser here to make sure nothing gets overlooked (such as retirement accounts, stock options or even reward points).
4. Determine alimony or spousal support
Alimony, aka spousal support, is based on income disparities, standard of living and earning potential. It can be temporary or permanent and will affect both spouses’ cash flow.
It’s a huge part of the process, but often a bigger concern for the lower-earning or stay-at-home spouse. So, while there will be financial help for that spouse in the beginning, it is very rare that it lasts forever.
Most likely, you’ll need to make lifestyle adjustments down the road.
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The length of alimony for a lower-income spouse depends heavily on state laws, the length of the marriage and the spouse’s ability to become financially independent.
In addition, temporary spousal support may be to help the lower-earning spouse cover immediate living expenses — such as housing, food, transportation or child care — until the divorce is finalized.
Big note: If your divorce was finalized after 2019, alimony is tax-free for the person receiving it and non-deductible for the one paying. For divorces dating back to before then, check your agreement or modification date.
5. Establish custody and child support
Custody and child support are typically determined according to state guidelines.
Most states calculate it by looking at each parent’s income, how much time the child spends with each parent and the child’s needs (food, housing, health care and child care).
Unfortunately, these guidelines tend to be outdated, so it’s important to think ahead … especially if the kids are young.
Talk to family and friends and plan for future expenses such as health care, education, extracurriculars, including travel sports, and college.
Addressing these issues now, within divorce agreements, can help avoid later disputes.
You have a bunch of big decisions to make in this stage. Be smart and thoughtful. Try not to be angry and resentful. You’re making difficult financial choices that will affect you and your children, potentially for years to come. So, don’t let bitterness and/or disappointment cloud your judgment.
But here’s the good news: You’re through the hard part.
Up next: the finalization.
