Recently i was reading an article on Life’s 15 most stressful events. Quite surprisingly “Divorce” was at no 2 in the list after “Death of a Spouse”. Almost 10% queries posted on my blog are related to financial implications of a Divorce. I will not term it as financial implications/mistakes rather these are financial blunders. Divorce is a personal matter between the couple. Based on my interaction i can conclude that emotions like revenge, anger, and resentment take over financial wisdom. The financial implications of a divorce take a backseat.
As a result, both husband and wife incur a huge financial loss. In past, i shared a post, how to marry personal finance after marriage. At the time of divorce, it is equally important to divorce personal finance amicably. Always remember that it is your (jointly) hard earned money. Instead of emotions, the better sense should prevail. I am listing 7 most common mistakes to be avoided. Otherwise, these mistakes will have huge financial implications.
Financial Implications of a Divorce – 7 Mistakes to be Avoided
1. Existing Assets can be easily divided:
Normally, the dispute on the financial settlement is the sole bone of contention between husband & wife. Each party tries to fetch maximum gains from another party. The end result, each party lose the maximum (financially) in this whole bargain. Though i am not sounding judgmental as each case is different. The quantum of alimony & custody of children is other most controversial topics. In my opinion, existing assets can be easily divided and distributed without much heartburn.
The following thumb rules may be followed (in my personal opinion)
(a) Each party can retain the respective assets created/acquired before marriage.
(b) The natural law of justice says that each family member should have an equal share if the wife is non-working/housewife. If the couple has 2 kids then the couple should agree to divide existing assets into 4 equal parts.
(c) In the case of working wife, existing assets can be divided into 3 parts equally i.e. Husband, Wife and Kid/s.
The biggest misconception in the mind of the husband is that if the property/asset is in his name then he is the sole owner of the same. Just to clarify that any property/asset acquired by the husband after marriage, as per law the wife is equal owner even if the husband is the sole owner. There is NO Point wasting time to resolve ownership issues. Both parties can check the provisions of law and divide existing assets.
A lawyer can promise the moon to either party. It is important that each party should understand their rights on existing assets in case of divorce. After that, assets can be divided amicably without 3rd party involvement.
2. Timing of Financial Settlement:
This is very crucial especially in cases wherein event like a divorce can impact the valuation of an asset. One of my clients Ms. Nupur and her husband decided to sell off the property. The reason being they were not able to decide on the valuation and who will occupy the same after the divorce. By that time, the whole world knows about their divorce proceedings. Such properties are normally heavily discounted property thus financial loss to both the parties. In the case of Ms. Nupur, the couple sold property worth 1.5 Cr for just 90L. It is difficult to get buyers for such properties even though the couple is selling with mutual consent.
Therefore before initiating divorce proceedings you should initiate financial settlement. Like in the case of Ms. Nupur, they would have sold the property at 1.5 Cr in case the financial settlement was initiated before divorce proceedings.
3. Loan and Debt
One of the unresolved issues between Husband and Wife is on who will clear the loan and debts. Even in a normal scenario of inheritance, loans and debts are an unwanted child :) as i shared in my post, Who is responsible for loan liabilities of a deceased borrower. In Hindi, there is a famous proverb that “Gulab ke saath kante bhi milte hain“. It means that even rose flower has thorns.
My take on this issues is that husband and wife should share loan and debt in the proportion of their mutually agreed upon share in the assets. In my post, mortgaged property – how to resolve husband wife dispute i discussed this point in detail. The post was specific to mortgaged property.
Here i am discussing sharing of debt and loan on a gross basis for a pool of assets not specific to a particular asset. The best way to handle the loan and debt is to prepay or close from common savings/assets. For example, husband and wife have 3 properties of 1 Cr each i.e. Property A, Property B and Property C. Now, there is 60L loan outstanding on Property C. In this case, husband & wife can retain one Property each under the financial settlement. The 3rd Property can be sold to clear the loan of 60L and balance 40L can be divided equally. Even one party would like to retain mortgaged Property C than either Property B or Property A can be sold to clear loan on Property C.
4. Stop Paying the EMI
This is the worst mistake and there can be various permutation & combination i.e. property is jointly owned but husband is paying EMI. Till the husband & wife arrive at a mutually acceptable decision on the loan & debt, status quo should be maintained on the EMI payment. In case, the EMI is stopped bank will attach the asset and auction the same. It will also impact the CIBIL Score of a borrower.
5. Legal Expenses
The legal process in India is quite painful, long and expensive. A couple can save on legal expenses if they mutually arrive at a financial settlement. They can also take help of their neutral friends and family members. In certain cases, the legal process may take even a decade. As i mentioned that divorce is one of the most stressful events in life. On top of it, the legal process makes it never-ending, tedious and tiring.
6. Change Nominations and WILL
In an interesting case, after the death of an ex-husband, the ex-wife claimed the assets of ex-husband based on the WILL executed 15 years back. The 2nd wife of ex-husband contested the same but court ruled in favor of ex-wife. Therefore, it is important to change the nominations and WILL in the event of a divorce
7. Insurance and Investment Products
This one of the most common left out in the financial settlement. In one of the instance, after 3 years of divorce husband claimed his share in the recently matured investment product of a wife. He claimed that he was not aware of this investment at the time of divorce but wife invested from joint savings. The investment was made after marriage but before the divorce. Therefore he claimed his share in the proportion of financial settlement at the time of divorce.
Words of Wisdom:
Though each case is unique and different but i tried to cover some of the common financial implications. It is important that emotions and mistrust should take back seat in financial decisions. As i shared, a practical and pragmatic approach can help to arrive at a mutually beneficial decision (financially). Any wrong decision can have severe financial implication for both the parties.
Lastly, both husband and wife should sign a financial settlement agreement to avoid any future claims as i shared in point no 6 and 7. Don’t forget to mention that financial settlement is full and final.
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