By Michelle Petrowski, CFP
Divorce is emotionally difficult enough without having to deal with a spouse who has cut you off financially, or a situation in which you just don’t have the resources to fund an equitable split due to game playing or delaying. Financing could save you a lot in the long run if assets are hidden or the other side is not forthcoming with information and funds are needed to hire a good attorney, CDFA® (Certified Divorce Financial Analyst), financial forensics professional, or financial support is needed for the family during the process.
Here are nine financing options you may want to consider (in no particular order):
- Home equity line of credit – A home equity line of credit (HELOC) allows you to borrow against the equity in your home, usually at a variable interest rate over a set period of time. With home prices high right now, many are finding equity in this asset class.
A judge could even order parties to pull equity from a house in order to pay for interim support and legal fees until a divorce is final. However, HELOC approval could take months to approve and lenders might not approve applicants during a divorce, which could cause a variety of roadblocks to a divorce.
- 401(k) Loan – These loans typically have lower interest rates than a personal loan and don’t get reported to the credit bureaus, however, you will need spousal approval to take out a 401(k) loan. Your spouse may agree to allow the loan as long as it reduces your net portion of the asset split and will not reduce the total marital portion of the asset to be divided. For example: 401(k) value at $100,000 with a $20,000 401(k) loan payable by the employee wife. Each party gets $50,000 in the settlement, but the wife’s portion is really $30,000 ($50,000 marital interest in 401(k) - $20,000 loan balance).
Keep in mind, the IRS requires you to repay the remaining loan balance within 60 days of leaving an employer or the loan will be considered a distribution, potentially causing tax and penalties to be due if you fail to repay it in that time period.
- Personal loan – Approval will depend on your credit score, existing outstanding debt obligations (debt to income ratio) and ability to repay. Additionally, interest rates will generally be higher than a 401(k) loan, but usually lower than a credit card, for most people.
- Security-based line of credit – A line of credit allows you to take a loan and borrow against the value of your investment portfolio, usually with a variable interest rate. This is usually used for short-term financing, as a bridge between two transitions – maybe even filing and settling a divorce. It is a method that prevents having to sell securities and incurring capital gains taxes in order to raise cash.
However, borrower beware, a security-based line of credit from a bank is subject to a higher degree of risk, as the bank may demand immediate repayment of the outstanding balance or require additional cash or securities to be pledged if the market goes down and underlying securities that guarantee the line of credit are now worth less.
- Whole Life Insurance loan – You can take a tax-free loan and borrow from the available cash value of a whole life policy. These typically have lower interest rates than a personal loan, do not get reported to the credit bureaus, and you can make smaller interest-only loan payments. A downside would be that the death benefit left to your beneficiaries, would be reduced by any outstanding loan balance still due.
- Attorney arrangements – Maybe you can have an arrangement with your attorney that will allow their fees to be paid from assets after the settlement (maybe from a retirement asset) or make monthly payments, including interest, until the balance is paid off. Again, no credit bureau reporting, but it may be more difficult to arrange, as attorneys are not in the money-lending business as a general rule.
- Credit cards – Strategically trying your best to spread the costs of fees across multiple cards and not exceeding the credit utilization limit of 30% on any one card whenever possible, is a good idea. Think divorce may in your future? Now may be the time, while you’re still marred, to consider opening a new card or two, and/or have your limits raised. Both options will be difficult for those with a low credit score, so start on improving that credit score now!
- Divorce funding companies - Believe it or not there are companies that specialize in divorce funding. Unlike a bank or finance company, funding companies assess funding eligibility based on the expected settlement from a client’s divorce proceeds, not current assets, income, or credit score.
Typically, no money is due until the settlement is final, and no mortgages are taken on the client’s property. However, how that affects the reporting on your credit bureau history or credit score, I don’t know. See These 3 people will fund your divorce. Keep in mind that terms can vary from taking a portion of the settlement, charging an interest rate, or taking a monthly fee and the balance at settlement.
- Court ordered fees – The moneyed spouse could be ordered by the court to pay both sides of legal fees and expert costs, but even with filing motions, this can be an expensive and time-consuming process.
If you are thinking about divorce, it may make sense to consider one or more of these venues and apply ahead of time. If you have already filed for a divorce, it is possible that the debt (whether 401(k) loan, borrowing cash value, etc.) can just be considered separate debt during the settlement, belonging to you without reducing the marital potion (see #2 above).
Of course, a financial decision should never be made without looking at your unique situation, considering pros and cons, the long- and short-term impacts of decisions including credit, future retirement resources, the ability to pay back debt, and more. Consider having the guidance of appropriate professionals. This is not meant to be financial, tax, or legal advice, but options for your consideration.
About the author: Michelle Petrowski, CFP®, CDFA®
Michelle Petrowski, CFP®, CDFA® (formerly Michelle Buonincontri), is a financial planner, wealth manager, divorce financial strategist, and personal finance coach. She is the founder of Being in Abundance and Being Mindful in Divorce, as well as an avid volunteer at Savvy Ladies in NY and Fresh Start Women's Foundation in Phoenix, and has worked closely with the Arizona U.S. Service Members. Michelle has been featured in CNBC, Forbes, MarketWatch, Investment News, Yahoo Finance and other media outlets. You can email her at Michelle@BeinginAbundance.com or schedule a Q&A call with her here.