The Smart Girl’s Guide to managing finances when going through a divorce

While the long-term financial implications of divorce may be lost on someone sucked into the vortex of legal fees, mounting household expenses and their new role as a single parent, it’s imperative to start planning

Being in an unhealthy marriage or filing for a divorce can go down as one of the most traumatic experiences in the lives of those who go through it. While the process can be an emotional rollercoaster, it is the financial upheaval that no one is prepared for. 

Mrunalini Deshmukh, a senior matrimonial and family lawyer known for handling celebrity divorce cases in India, maintains that for a majority of divorce cases, the bone of contention is usually money or child custody. In her book, Breaking Up: Your Step-by-Step Guide to Getting Divorced, she points out that 90 per cent of all cases end up becoming a conflict over money. “Whether they start out as contested or not, or whether it takes one year or six years, at the end of the day, divorce proceedings usually involve the negotiation of monetary terms to facilitate a settlement. In the absence of security in a relationship, monetary security becomes the next comforting factor. So, sort out your financial position and figure out how much you need to give or receive to go through with your divorce,” she states.

While  the long-term financial implications of divorce may be lost on someone who has been sucked into the vortex of legal fees, mounting household expenses and their new role as a single-parent, it’s imperative that you start planning.

Experts including lawyers, personal finance planners and tax experts give you some insight into what one must look at when heading for a divorce.

Take control of your finances and assets

The minute you know thatthere is trouble brewing in your marriage, you should start taking charge of your finances. Try and get your hands on every piece of documentation you possibly can, if you don’t have access to it already. From bank statements, income tax returns, property papers, investments made, and benefits that a company may offer your spouse—such as stock options—should be carefully listed for consideration. More importantly, it is critical to be clear about any liabilities that you may have as a joint-account holder, a guarantor for a loan, or if you hold power of attorney.

Moreover, protect what is rightfully yours. “There are career-oriented women who have built their own assets. Or at the time of their wedding, have inherited a sizable amount from their parents or grandparents. It’s important to keep these separate and not merge them with your husband’s finances. It becomes very difficult to retrieve these, if merged, and you don’t know where it is or where it has been used,” says Mridula Kadam, a senior family court lawyer.  Women must also be aware of, and have complete control over their ‘stree dhan’. These include not just gifts such as money, jewellery, gold or property given to her as gifts at the time of marriage but also during the course of the marriage. “Many a times, it’s either with the mother-in-law, or handed back to the husband for safe-keeping, and this can prove to be a disadvantage. Your things and assets must be safe with you,” adds Kadam.    

Pick a number

How do you come up with a figure that is reasonable, is close to your actual expenses, and anticipates your future needs? “The biggest challenge (in a divorce) is that people don’t know how much they need, as keeping track of accounts is no longer a habit,” says Kiran Telang, financial planner and author of Moneywise Perspectives for Women.

In such a situation, it’s important to get down to the brass tacks. It's essential to understand the income figure correctly, as all your expenses and savings emanate from here. Next, take some time to go over your bank and credit card statements. Account for every expense, down to the last rupee. These include essentials such as rent, groceries, health, transport, utilities and staff salaries, to discretionary spending such as travel, eating out, gym memberships and every other aspect that goes into maintaining your lifestyle. It is also important to anticipate your financial needs in the future. For instance, the cost of potential inflation, or if you have young children you should take into consideration the expenses that come as they get older. This clear and reasonable break up of numbers will also hold you in good stead when you put forth your case in court—to be clear on why you need the amount you need, in spousal support. 

Alimony 

Alimony is the legal term for spousal support. The Hindu and Parsi divorce laws on maintenance are gender-neutral, which means the husband or the wife can seek spousal support, says Deshmukh. In all cases, the courts look at the evidence and then decide the quantum of maintenance due to the spouse that seeks it. By and large, it is the husband who pays for it. The wife applies for maintenance and the matter is decided by the courts after giving careful consideration to reasonable wants, expenses, incomes of both parties (if any), dependants and the lifestyle enjoyed during the period of co-habitation and at times, the number of years invested in the marital relationship.

“As women we have to be exceedingly balanced and aware of what our rights and duties are,” says Deshmukh. “What I am suggesting is that women should be able to make a correct and fair assessment. A woman who is 40 years old and going through a divorce, has better chances for resettlement in life—to find a new partner and continue to earn, as compared to someone who is, say, in their late 50s, and closer to retirement. Not that one cannot find a partner at that age, but chance and probability are two different things,” she says. There is an independent mechanism in law, where the children born from the marriage are entitled to be financially supported by the main breadwinner. However, the law says that both parents can be asked to contribute towards the maintenance and support of children in proportion to their income and net worth.

Lump sum or monthly installments?

When it comes to seeking alimony, another critical consideration is whether to opt for a lump sum payout  or accept monthly installments in spousal or child support. Experts ranging from divorce lawyers and personal finance advisors to tax experts recommend you opt for a lump sum payout. “Even if it is a little less than your expectations, it is better to get a lump sum,” advises Kadam. “If you opt for a monthly payment from your husband, you are (financially) dependent on him again. Why should you be connected to your ex- spouse or be at his mercy?” Bills such as school fees can’t be deferred, they need to be paid on time. This means that each time there is a delay in payment, whether intentional or not, the onus is then on you to chase the payment, while you make alternate arrangements to meet expenses on hand. Moreover, taking things to court in that situation is not the best option, as these things take time and litigation can drag on for years while costing you a pretty penny. “However, if you get it as a lump sum, you can invest it wisely and get good returns,” she says. 

From a taxation perspective too, it would be prudent to opt for a lump sum pay-out. Considering that there is no specific provision of the Income Tax Act, 1961 that governs the taxability of alimony, it all boils down to how the payment is made, says Naveen Wadhwa, a chartered accountant and deputy general manager at Taxmann, a research and advisory firm. In case of a lump sum payment, the alimony is treated as a capital receipt and therefore, the provisions of the Income Tax Act, 1961 do not apply. It is not treated as income and is therefore not taxable. In the case of recurring payments such as monthly payments, the alimony is considered as a revenue receipt, and hence treated as income that is taxable in the hands of the recipient, he explains.

Health Insurance

If you have been on your spouse’s health insurance plan until your divorce, you will no longer be able to use it. It is one of the critical aspects to consider when you are separating, as unforeseen medical expenses which require hospitalisation can set you back financially and even push you into debt. Getting your own health insurance policy can be expensive and sometimes difficult, if not impossible, particularly for people with pre-existing medical conditions. Whatever the situation, it is critical to make this assessment fairly early on before the divorce comes through, so you can negotiate the cost of insurance while discussing the alimony. 

Credit History

When you are separating your finances, it’s important to keep an eye on your credit score. The credit score rates a consumer’s credit-worthiness and gives lenders, such as banks, a fair idea of how reliable you might be if you were to borrow money. It takes several factors into consideration—the number of open accounts, the number of loans or level of debt accumulated, credit card payments, defaults, repayment history, and so forth.

When there are joint bank accounts or joint liabilities with your spouse, it leaves you open to the possibility of them damaging your credit score—intentionally or otherwise. You need to ensure that you don’t suffer the consequences of someone else’s poor financial actions. While the divorce status is not listed on your credit score, it can get adversely impacted if you are distracted and forget to make credit card payments on time, or start using your card recklessly. This is important to avoid, because you need good credit the most at this time. Once your divorce and the subsequent untangling of finances comes through, check your credit score to ensure it reflects the correct information—your new address, that your accounts are solely held by you, and that cards and accounts which were jointly held are removed.   

Life insurance

If you have dependents such as young children, ensuring that you have a life insurance policy in place is a good idea.However, experts maintain that you need to tread carefully. “There is a moral hazard in taking a life insurance policy,” says Telang. People tend to get a high-value life insurance policy to protect their child in case something happens to them. But when the estranged partner is the natural legal guardian in your absence, you may want to reconsider the decision. “It is a far-fetched thought, but it does exist,” says Telang. If you still feel life insurance is necessary, pick the beneficiary carefully. “The money from the insurance policy should be put in a trust in the name of your child. Ensure that the  trust deed is meticulously drafted to ensure that your children get it, no matter what.You can name two or three people as trustees, who then decide how the money will be used,” says Kadam, adding that creating a trust for your children is a good tool to protect the assets and investments that you want to leave for them. The court is very stringent about protecting the rights of minors in such cases. 

In retrospect

A fact that has been stressed repeatedly by lawyers and financial experts is that women should be clear about where their money is, how it has been invested and how it is being managed. “It’s not like you should pay attention to these things only when things go downhill in your marriage. It could be any unforeseen event—a prolonged illness, the death of a spouse or a bad financial patch. Knowing where your assets and money are parked is crucial for every woman,” says Kadam.

Do not sign any documents blindly. Read and understand the document and keep a copy. Have a set ready to show your attorney or chartered accountant should there be a problem in the future. Also ensure that you understand your liabilities if you sign up as a guarantor for a loan, or sign on power of attorney documents.

Lastly, keep your finances separate and avoid having joint accounts. “If it is unavoidable, ensure you also have your own individual account which is completely under your control,” advises Kadam. 

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