Financially Untangling Yourself from Your Spouse

Getting a Fair Property Settlement in your Illinois Divorce

On the surface, dividing assets during a divorce may seem straightforward.  In Illinois, all marital property acquired during the marriage must be divided equitably.  The goal is to financially untangle yourself from your spouse.  For most couples that will mean: dividing the house, retirement assets, savings, and debt.  It usually also requires child support or maintenance.  Below we discuss common issues that arise when dividing these assets or responsibilities that may not be obvious.

All Marital Property is Divided in Divorce

During a divorce, all marital property needs to be divided.  Marital property is all property acquired by either spouse during the marriage with the following exceptions:

• Property acquired during the marriage by gift, legacy or descent or property acquired in exchange for this property
• Property acquired in exchange for property acquired before the marriage
• Property acquired by either spouse after a declaration of legal separation
• Property that has been excluded by a valid agreement between the spouses, such as a prenuptial or a postnuptial agreement.

Properly classifying property as marital or non-marital is a critical first step in the process of dividing marital property.

Marital Property is Divided Equitably

Marital property is divided equitably.  Equitable division does not necessarily mean an equal distribution.  The Illinois Marriage and Dissolution of Marriage (“IMDMA”) Act provides the following factors when considering an equitable distribution of marital property:

• Each spouse’s contribution to the acquisition and preservation of the property
• The contribution of either spouse as a homemaker or caretaker
• Whether or not either spouse dissipated any assets
• The value of the property that is assigned to each spouse
• Each spouse’s relevant economic circumstances
• How long the couple was married
• The employability, health, age, education, and earning capacity of each spouse
• The tax consequences of the property distribution
• Custodial provisions for children of the marriage

Financially untangling yourself from your spouse begins with completing a financial affidavit, which is required of all parties going through a divorce in Illinois.  The financial affidavit is an inventory of income, expenses, assets, and debts.  For most couples, the work of untangling themselves financially will be centered on how to handle the marital home, retirement accounts, debt and support.

Dividing the Marital Home in Divorce

Dividing the marital home is often contentious.  Not only is the marital home often the largest asset in the marital estate, but it represents more than just a number on a spreadsheet.  The marital home may: evoke cherished memories, define your community, and dictate where your children attend school.  For these reasons, the marital home is often overvalued by one or both spouses.

While one or both spouses may have a strong emotional attachment to the property, assigning a value to the property is as easy as getting an appraisal to establish the fair market value.  Once fair market value is known, subtracting any mortgages, HELOC’s or other liens yields the equity in the home.  The equity in the home is the amount of money that needs to be divided between the spouses.

Dividing the equity in the marital home is straightforward when the home is sold because the equity is converted to cash.  Things get more complicated when one spouse wants to “keep” the marital home.  When one party wants to keep the marital home, there are usually three options: 1) buy-out the other spouses’ equity with off-setting assets of similar value, 2) utilize a cash out refinance to pay off the existing mortgage and secure funds to buy-out the other spouse’s equity, 3) continue to co-own the home until a future date when it will be sold and the proceeds divided.  Each of these options presents its own challenges and limitations.

There may not be other sufficient assets in the marital estate to compensate the other spouse for foregoing his or her equity in the home.  Even if there are sufficient assets to award to the other spouse, you need to consider whether the assets are really comparable.  For example, a 401(k) of the same dollar amount may be far more valuable in 10 or 15 years than the equity in a house in 10 or 15 years.    With respect to refinancing, it is only possible if the spouse keeping the home qualifies for a new mortgage based on his or her own credit history and income.

When refinancing is not possible, co-ownership may seem appealing.  It allows one spouse to stay in the house a little longer (often until the youngest graduates from high school) and then the equity is split.  One major drawback of co-owning the home is that it can tie up available credit precluding the other spouse from buying a place of his or her own and moving forward.  These are just a few of the issues that you may confront when dividing a marital home.

Dividing Retirement Accounts and Pensions

The marital portions of any retirement accounts, including IRA’s and 401(k)s, need to be divided during a divorce.  Dividing an IRA is often straightforward without any tax implications or penalties, but determining the marital portion of the account can sometimes require the help of an expert.  A letter of direction may need to be sent to your financial institution directing them to release funds to your spouse.

A 401(k) is less straightforward.  A Qualified Domestic Relations Order “QDRO” is necessary to divide the account and will need to be approved by the plan administrator and the court. The recipient spouse may elect to roll over funds into an IRA, keep the funds with the same institution but under a different account or receive the funds as cash.  There are no penalties for a 401(k) distribution to the recipient spouse or “alternative payee,” but the recipient spouse is responsible for paying income taxes on the funds received.

A pension must also be divided using a QDRO.  The value of a pension is sometimes overlooked by couples trying to settle their cases quickly and cost effectively.  A pension is usually a more valuable asset than it would first appear.

Debt in a Divorce

No division of marital property would be fair if it failed to allocate a couple’s debts.  Debts can include car loans, business loans, student loans, personal loans, medical debt and credit cards to name a few.  Frequently, individuals wrongly assume they aren’t responsible for their spouses’ debts. Debt incurred by either spouse for a marital purpose after the date of the marriage belongs to the marital estate.  It would not be fair to divide up the cash and savings and leave one spouse stuck paying all the debt.  Debt can be emotionally charged because it prevents individuals from moving forward, but also because they may not have been aware of the amount or nature of the debt.  When it comes to debt it is preferable to pay it off with marital assets before the divorce is concluded, but frequently there is insufficient cash to pay off all debt or any available cash is needed to fund the purchase of a new home.

If the debt is not paid off during the divorce, it is imperative that the parties have a clear understanding of who is responsible for each debt and whether the other spouse is obligated to make any contribution.  (Significantly, your creditors may still seek repayment of your debts from you even if your spouse is required to pay the debt under the terms of your marital settlement agreement or divorce judgment).  Protecting your credit and your monthly cash flow will guide your decision making.  In some cases, if debt was incurred for a non-marital purpose, you may argue that your spouse dissipated marital assets and should be solely responsible for that debt.  Spending marital money on gifts or entertainment for a significant other are common examples of dissipation.

Spousal Support & Maintenance

Whether you are paying or receiving monthly spousal support or child support, knowing how much income you will have available to meet your monthly expenses is critical to planning for your future.  Illinois uses the Income Shares model to set child support.  Under this model, child support is shared by both parents in proportion to their incomes and, to some degree, the amount of overnight parenting time they spend with the children.

Spousal support (maintenance) is support paid to a financially dependent spouse.  The IMDMA sets forth guidelines for the amount and duration of any maintenance payments.  When you are contemplating a division of your assets, you should have a fairly accurate idea of how much support you might be obligated to pay or likely to receive.  This information will help you determine what your monthly budget will look like following your divorce.  While many factors may influence the ultimate support award, with the income data for both parties, your attorney can give you some guidance as to the calculation of support to help you move forward with the process.

Consult with the Best Naperville Divorce Lawyer

From a monetary perspective, divorce is about determining how and when you will cut all financial ties to your spouse.  While the process may evoke strong emotions, if you can set aside the emotions even temporarily, it will help you appreciate what is the most financially favorable property settlement available to you.  At Goodman Law Firm, LLC we can help you determine if a proposed division of assets is in your best interests.  If you are contemplating retaining a Naperville divorce attorney then you want to find the best divorce lawyer to fit your needs, whether you are initiating a divorce action, navigating the divorce process or addressing post-decree issues. Reach out to Cameron H. Goodman of Goodman Law Firm, LLC for a consultation to discuss your case.  Contact us today to schedule a consultation.