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Divorce and Financial Matters

Besides knowing the law and empathizing with your client’s emotional state, a family law practitioner must have a pretty solid foundation in how to prepare a household budget and when and if bankruptcy should be considered. Why? Because, next to custody disputes, the division of debts and the client’s reduced financial status are where most of your time is spent.
 
The movies portray divorcing couples as arguing over how to divide up the marital assets and their vast fortunes. In reality, however, this is rarely the case. Your client and the spouse are far more likely to battle over who has to pay the marital debt. This is true especially true in the current economy. Therefore, you need to be able to provide some basic guidance on creating a budget, if and when a bankruptcy should be filed, and good sources of advice on topics beyond your skill and expertise.
 
Creating a Budget
 
Many clients are shocked at how difficult it can be to make ends meet following a divorce. Even if your client has been employed during the marriage and is able to get child and spousal support, the income following a divorce is generally far less than the income prior to a divorce. Thus, it is logical that the expenses will also need to decrease proportionately. However, this is easier said than done. Having one less person is the household generally does not equate to the decrease in expenses. Many expenses are a set fee, such as telephone, cable, internet, insurance premiums, etc. So what do you do?
 
When you are first retained by a client, go over the divorce paperwork thoroughly. This information usually requires the client to provide a very detailed breakdown of household income and expenses. When your client completes this paperwork, it is a good idea to go one step further and discuss the possible budget after the divorce. Prepare the client for the decreased income and look at possible ways to reduce expenses. Find out what the client is willing to forgo, and what is truly important. This will help you to prepare for what to request for support obligations and property settlements. It will also help the client to get more familiar with how to budget for the financial shortcomings following the divorce. If necessary or requested, you may also want to recommend a credit counselor in your area to further assist the client in this area. Take the time to meet with people at credit agencies and local banks so that you can make good recommendations.
 
Filing for Bankruptcy
 
Unfortunately, bankruptcies are common before and after divorce. Sometimes, the parties’ financial situation caused a lot of the marital strife, and other times the parties discover that it will be impossible to pay off the marital debt after the marriage is over. In either situation, the timing of the bankruptcy is very important.
 
If your client intends to file for bankruptcy, encourage him or her to do so prior to filing for divorce. If the parties can get all of the debt issues taken care of, the divorce will be a far less painful process. Also, the parties will know exactly who is required to pay what debt and how much money is left over for other obligations. Further, it is cheaper to file one bankruptcy petition than it is to file two separate ones.
 
If the parties cannot or will not file for bankruptcy together, you will need to counsel your client on what may happen if a bankruptcy is filed after the divorce becomes final. Generally, child and spousal support obligations cannot be discharged and take priority over all other debts. Therefore, if you are representing the payee, try to get as much of the divorce settlement in the form of support as possible. Property settlements can be discharged, and your client, as the payee, will need to file a complaint to request an exception to discharge of the settlement property. You can also advise your client to get a security lien on property owned by the payor spouse so that your client can seize the property if it becomes part of a discharge in bankruptcy. Both parties can also go back to the divorce court following the bankruptcy to seek a modification of the terms of the divorce and any support obligations in light of the change in circumstances.
 
Another possibility is that your client’s spouse has already filed for bankruptcy before your client seeks a divorce.  In this situation, you should wait to file the divorce petition until after the bankruptcy is finalized. You will need to know what assets and debts have been discharged to include any changes on the paperwork to be filed with the divorce court. If temporary orders are required, such as temporary custody of the children, the divorce may be filed but the final hearing cannot occur until the bankruptcy proceeding is completed. The divorce court simply cannot make any orders as to the parties’ assets and debts until the bankruptcy proceeding becomes final.
 
Other Advisors
 
If your client needs assistance in developing a budget, financial advice concerning what to do with any money received as part of a settlement, or how to file a bankruptcy (if you or no one in your office handles bankruptcy cases), be sure to have some recommendations available to offer your client. Whether you chose to provide a list of all such individuals and/or firms in your area or only those whom you know personally, your client will greatly appreciate your assistance in this area. Divorce is hard enough emotionally and financially without adding more responsibilities, such as seeking advice on other legal and financial topics. Many people have never dealt with these types of issues before, and they have no idea where to even begin.
 
Some credit resources:
 
 http://www.nfcc.org/ - National Foundation for Credit Counseling
 
 
 
http://www.consumercredit.com/ - American Consumer Credit Counseling