People think of a divorce as an event – the end of the marriage, division of assets, orders to pay alimony, allocation of debts, etc.
In fact, a divorce is a process. From beginning to end, the typical divorce case will be pending for several months &, in extreme situations, the case may remain open for years.
It is important to know about the financial stages of a divorce case – Divorce Accounting 101.
One Party Knows – The Other Party Does Not Know
It is common for spouses to allocate ongoing responsibilities between them, including handling the financial aspects of the household – Spouse One keeps track of the money and Spouse Two assumes everything is OK unless Spouse One sounds an alarm. The system functions efficiently but creates an information gap between the parties. That gap can be a significant problem when a divorce suit is filed.
A divorce pumps up the parties’ financial issues. Expenses increase & cash flow does not. Spouse Two is shocked when Spouse One sounds the alarm – what did Spouse One do with all that money?
Accounting Step One: History
The saying used to be, “there is a paper trail for everything.” Technology has replaced the paper trail with an electronic trail. In the typical case, a huge volume of financial data exists in electronic form – bank statements, payroll records, investment account statements, tax returns, etc.
In order to overcome the distrust factor in the divorce, Spouse One needs to compile the parties’ financial data and deliver it to Spouse Two.
Accounting Step One is reconstruction of the financial history – how much money came in & how much money went out and what exists now.
Accounting Step Two: Budget
A cash crunch is often part of a divorce. Separating one household into two households is expensive. The pinch comes about when expenses climb but cash flow remains stagnant.
Each party needs to create an income and expense statement – a budget.
Putting the numbers down on paper brings home the financial facts of the case. If the income figure is larger than the expense number, that’s great. If there is a shortfall, some changes need to be made – cut out the trips to Starbucks, pay the minimum amount on credit card balances, suspend contributions to retirement plans, increase overtime work, etc.
Accounting Step Two raises questions about how to handle the cash crunch without wiping out the parties’ assets.
Accounting Step Three: Balance Sheet
Completing steps one and two leads to step three. The parties’ financial status (Step One) usually changes during the pendency of the divorce (Step Two) resulting in the final balance sheet (Step Three).
The balance sheet is the checklist for dividing the parties’ assets and debts. The decree of divorce will divide the assets and debts between the parties.
Accounting Step Four: Division Of Property
There is no requirement to divide the marital property equally between the parties – but, 50-50 is a good starting point for thinking.
The judge will start with a 50-50 calculation and then consider whether there is a reason to vary from that figure. The judge will consider all of the facts (the good, the bad and the ugly) that were part of the Step One: History in deciding how to divide the marital estate.