Developing a budget should be a top priority in the divorce process

Financial awareness is necessary to advancing the divorce process and, ultimately, dissolving a marriage. This is true whether the divorcing couple has significant financial resources or virtually nothing. If significant wealth or income is present, then each party will be seeking assurances that his or her standard of living will not change due to the divorce. If the couple has been living near poverty, then basic survival of the parties and their children will be the issue. Financial awareness comes from the hard work of developing a budget and valuing the marital estate (what the couple owns minus what the couple owes = the marital estate).

Prepare a budget (or, better, budgets) early in the divorce proceedings

In the midst of anxiety over who gets what (including child custody), the basic budget process is often overlooked until the process is well under way. In fact, the development of a budget should be one of the first issues addressed by both spouses and their divorce lawyers. First, financial disclosures, including income, are normally required by regulation; that is, in order for parties to divorce, courts usually require the disclosure of assets and liabilities (along with their disposition) and the income of the parties. Second, the budget process can be used to determine transfer payments, including alimony (maintenance), family support (payments to support a spouse and children during the course of a divorce), and child support. Third, the budget process also makes it evident who (if anyone) can support major assets, such as the parties’ residence. Finally, the analysis of a budget may indicate that the parties’ financial condition is without hope and that the provisions of bankruptcy should be brought into play.

It is not unusual to prepare at least two budgets. The first will be used to address the needs of the parties during the course of the divorce. The second will be used to paint a financial picture of the parties subsequent to the divorce. The first budget will be used either to raise concerns about the current financial conditions of the parties or to alleviate them. If one of the parties is going to be in financial distress during the divorce, his or her budget will make the situation evident and transfer payments can be established to protect that party. If both parties are going to be in financial trouble, then a determination can be made that protection from creditors should be sought through bankruptcy regulations.

Establish a “needs hierarchy”

Whether one or both parties is in financial distress, a “needs hierarchy“ can be followed to determine what expenses get paid. The hierarchy goes like this:

First: People
Second: Possessions
Third: Credit Rating

The physical, emotional, educational, medical, and mental condition of all parties, including the children, should be protected first. Food, shelter, and clothing (the essentials of life) come before any other consideration. The protection of possessions comes after the protection of people. These expenditures include payments on the home mortgage and vehicles. The lowest level in the hierarchy is unsecured creditors. The majority of entries in this category are normally credit cards.

Putting this hierarchy to work in the real world can be challenging. Individuals who are accustomed to paying their debts on time, having an adequate cushion for emergencies, and being financially responsible generally will have difficulty adopting the survivor mode often required by a divorce. Additionally, the emotions involved in the divorce process often skew basic logic. This environment, for example, leads to parents paying on credit cards when funds do not exist to buy groceries. Moreover, the lines between the levels of hierarchy often blur.

For example, if an individual stops making payments on his or her car, it may be repossessed, making it impossible for that person to get to work; lack of income will definitely have a negative impact on caring for people. Individuals often find themselves living off of credit cards during a divorce, knowing that if they make the minimum payment on a card, they can continue to use it and obtain funds, goods and services up to the card’s limit. Consequently, blind application of the hierarchy is often not the best maximization of available resources. That said, the hierarchy serves a valuable purpose, and you may find it helpful to be reminded of the following during the course of the divorce process: You cannot replace people, and you most certainly do not want them to suffer. You can replace assets if they are lost by failing to make payments on them, and credit ratings can be rebuilt if destroyed.