What is a Certified Divorce Financial Analyst or CDFA?

What is a Certified Divorce Financial Analyst or CDFA?

It seems incredibly unfair that at a time when you are dealing with the emotional stress of separating from your spouse, you also have to deal with worrisome and complicated financial issues too. As much as any other time in your financial life, it is vital to get professional help with your money questions when you are experiencing a divorce. One person in particular who take a lot of weight off your shoulders is a Certified Divorce Financial Analyst or CDFA®.    For many clients, divorce is the largest financial transaction of their lives. The role of a CDFA® professional is to address the special financial issues of divorce and help litigants achieve a settlement that will work both today and in the future.

Prerequisites

The Institute for Divorce Financial Analysts (IDFA™) is the premier national organization dedicated to the certification, education and promotion of the use of financial professionals in the divorce arena.  The IDFA sets the standards for all CDFA professionals.  The eligibility requirements for CDFA’s are established by the Board of Advisors and reflect the fact that a CDFA is not an entry-level designation but an advanced program.

Individuals with a minimum of three years of professional experience in finance or divorce and a Bachelors degree are eligible to enroll in the CDFA® Program. IDFA will accept ten years of professional experience from those candidates that do not have a Bachelor’s degree. This includes experience as a financial professional, accountant, or matrimonial lawyer. Candidates should also have working knowledge of financial calculators before purchasing the program.

Skillset of a Certified Divorce Financial Analyst

Divorce Financial Planning is the application of the discipline of financial planning to settlement strategies in divorce. The process requires the synthesis of tax, insurance, retirement and other areas of knowledge with their specific application to divorce. CDFA holders must possess experience with a and a strong knowledge base of a multitude of divorce related financial and legal issues, including:

• Personal vs. Marital Property
• Valuing and Dividing Property
• Retirement Assets and Pensions
• Spousal and Child Support
• Splitting the House
• Tax Problems and Solutions
• Expert Witness Testimony
• Tax Law and Financial Issues Affecting Divorce

 

Maintaining the CDFA Designation

Once a candidate completes the CDFA® course, the designation is valid for one year, after which a fee must be paid annually.  To assure continuing competency in tax codes, legislative and other ongoing developments in the field of divorce financial planning, a candidate must report 15 hours of divorce-related continuing education every two years.

Code of Ethics

The Code of Ethics and Professional Responsibility is provided as an expression of the ethical standards that IDFA has adopted and every CDFA professional has agreed to abide by. The code applies to every CDFA designee and candidate in conducting divorce-planning work.

1. Integrity: Maintain the highest standard of honesty and integrity when dealing with colleagues, IDFA, clients or lawyers.

2. Competence: In addition to satisfying the continuing education requirement needed to maintain the use of the designation, every CDFA professional should serve their clients competently. Therefore, acquiring the knowledge and skill necessary to do so in the area of divorce planning is required.

3. Objectivity: Objectivity requires a CDFA professional to be intellectually honest and impartial. Regardless of who hired him or her, a CDFA professional will always be objective when dealing with clients and their lawyers.

4. Fairness: To alleviate the risk of potential conflict of interest as well as to not confuse the public, CDFA professionals should separate their financial practices and their divorce-planning practices to ensure divorce-planning recommendations are made independent of the potential financial planning relationship.

5. Confidentiality: CDFA professionals shall hold client information to the highest standard of confidentiality. Short of client consent or appropriate legal process, a CDFA professional shall not release any information about their client before, during or after the divorce.

6. Professionalism: A CDFA professional’s interactions shall project the highest level of professionalism. Whether dealing with clients, lawyers, IDFA or any of its partners or subsidiaries, a CDFA professional will behave in a professional manner.

7. Scope: A CDFA professional, by education and training, is a specialist dealing in the financial issues of divorce. Working alongside the lawyer who is licensed to practice law, a CDFA professional must never (unless licensed to do so) advise clients on their legal rights.

8. Compliance: A CDFA professional will comply with all the laws related to the business they conduct and report to IDFA any actions by other CDFA professionals that are illegal or in violation of this code. In addition, a Certified Divorce Financial Analyst professional will comply with any requests from IDFA for information regarding any complaints brought against him or her. If IDFA, after comprehensive investigation, decides that either suspension or revocation of the CDFA designation is the proper remedy, a CDFA professional will comply with the order.

9. Unauthorized Practice of Law: A CDFA professional understands that in order to practice law, one has to be licensed. Under no circumstances will a CDFA professional represent that the IDFA certification is a license to practice law.

10. Support: A CDFA professional will always support our profession and IDFA as the main driving force behind the progress of the profession.  Additionally, a CDFA professional will not collude, debase or discredit IDFA or the profession

 

Do you need a CDFA?

Simply put, if you and your spouse have assets of significant value, the financial ramifications can be quite complicated. At this emotional time, it’s best to trust someone experienced with these kinds of issues rather than trying to learn on-the-fly. Money mistakes made at this time could have far-reaching consequences for your new life.

How do I find a Certified Divorce Financial Analyst?

The easiest way to enlist the services of a CDFA is to ask your divorce attorney for a recommendation. If you want to find one on your own, the Institute for Divorce Financial Analysts can help you locate an analyst in your area. Find them here.

You will likely find having one less thing to worry about—or several less things—during this difficult time is of tremendous value to you. A CDFA can lift some of the burden from your decision-making load.  Schedule an appointment today with Denise French, CDFA who not only has the professional experience to help you with the finances of your divorce, but she’s walked through her own divorce and can help you navigate yours.

Dividing Financial Assets During Divorce In a Volatile Market

Dividing Financial Assets During Divorce In a Volatile Market

The U.S. stock market continues to be a daily surprise — sometimes shock — to investors and businesses across the country. While there’s never a promise of financial gains in the stock market, there are times, such as now, during which anxiety about your financial security is heightened.  Divorce is also a time when financial anxieties grow. When the stock market and economy go crazy, you might worry you’d be crazy to pursue a divorce in a volatile market.

Economic fears are understandable, but you can get divorced during a tumultuous market and still come out with your financial security intact. You will just have to be extra careful and strategic during property division negotiations.  This is also a critical time to enlist a Certified Divorce Financial Analyst (CDFA) on your divorce team.

 

Know Type of Accounts and Cost Basis

If you are like many working couples, you have money saved in retirement accounts like an IRA or 401(K) as well as other money invested in the stock market.

A retirement account is also called a qualified account.  When you take funds out of an IRA to cash in your bank the money is taxed fully as if you had worked for a company and earned that money.  If you are under 59.5 years old you may also be hit with a 10% penalty on IRA accounts taken out in cash.  Conversely, if you cash funds out of a 401(k) or other ERISA governed group retirement plan owned by your spouse, you will still be taxed on those funds, but you will not pay the 10% penalty if you take them out pursuant to a divorce and a Qualified Domestic Relations Order or QDRO.  This all applies to a cash distribution.  Any retirement funds you move into your own IRA will have no tax due.

During volatile markets when the values are low, it will be wise to work with a Certified Divorce Financial Analyst to determine if now is the best time to convert these funds to a ROTH IRA.  If you do so, you will pay tax now on the lower values but not pay any tax in the future on the growth of the account or distributions from the account years down the road at retirement age. Further you can also use ROTH IRA funds within certain parameters, for a first time home purchase or for education.

The non-retirement accounts are non-qualified accounts. The taxes related to these accounts are handled differently than taxes tied to qualified, retirement accounts.   When addressing non-qualified accounts and stocks, pay attention to cost basis. The cost basis of an individual security (stock) is the cost you and/or your spouse paid for it at the beginning. Let’s assume you both decide to split the value of the stocks.  You want to look at more than the current value of your investments. You need to know which stocks have increased in value since you bought into them and which have decreased in value.  This might sound backwards, but the stocks that have decreased in value compared to their cost basis can be better for your finances in a divorce. Why? Simply because of taxation. If the government sees there’s been a financial loss, you aren’t taxed for that. If you only get the share of stocks that have increased in value, the taxes you pay in capital gains could result in a lower payout for you.

 

Stock Market Risk Tolerance

Another factor to consider is the experience and comfort of the spouse who originally managed the account versus the spouse who is receiving the account.  For example, just because the spouse who traditionally handled the accounts is very aggressive and has a comfort level with stock market risk, the other spouse taking over those funds may not.  The accounts may need to be moved into a different set of stocks or other assets for the comfort level of the spouse taking over the stock account, especially in a turbulent market.

We had a client who’s spouse was a financial advisor.  He was very comfortable with stock market risk and understood complex investment concepts.  His wife had never had to worry about their investments.  We took over her account after the divorce and found it was invested in an extremely aggressive S&P 500 2x portfolio which meant it moved like the S&P 500 did, only twice as far.  In up markets that is great, they captured double the return of the markets. However, in down markets it would be catastrophic. We moved her into a more conservative portfolio which proved to be very helpful when the markets fell.

 

The Wording Will Make All the Difference

When dividing divorce assets and debts, the estate will usually be divided as of a certain date.  In Texas, you will typically be mandated to attend at least one mediation.  When you choose to finalize the details of your estate in mediation, that tends to be the date of division.  After mediation, attorneys will draft your divorce decree from the mediated settlement agreement, review it with you and then schedule a date and time to attend court to finalize your divorce.  These steps take time.  The date of division could be months away from the actual date of divorce (when you can start dividing the assets) which is why the wording in your division is so important.

For those who finalized the division of their estate in mediation in December of 2019 but didn’t get divorced until March of 2020, the wording would be critical.  For example, if you had stated you wanted a set amount you would be thrilled because the market losses would not affect you (unless the account became smaller than what you were awarded).  Conversely, if you agreed to take 50% of the estate including gains and losses in the account you will participate in the market swings whether up or down.

No matter which option your choose and agree to in mediation, a set dollar amount or a percent of the estate, you will want to understand what you are choosing and have some level of control over the assets in such a volatile market.  This should provide peace of mind in knowing roughly what you are getting in your estate settlement.  You can also request the funds be put in more conservative investments while the divorce finalization is pending. You do not have to sit in fear throughout this process, you just need to have help from someone who understands how this works.

 

Divorce in a Volatile Market: Keep Calm and Invest On

It is very common within a marriage for one spouse to control the investment decisions and the other spouse to not. If you were the spouse who did not make investing decisions, you aren’t alone in not fully understanding how the markets and investments work. For many who get divorced, the marriage ends and, suddenly, they are left wondering how to manage a stock portfolio.   This new post-divorce reality can lead to anxiety. Worry about affording life after divorce, along with the felt ignorance when faced with the stock market, can result in a knee-jerk financial decisions. Many with less experience running the finances will choose to simply cash out all the stocks they received through the division of assets. Making the decision to cash out from an emotional place may provide some immediate relief; but could really hurt you in the long run.  While cash is the best place for an emergency fund and for safety for part of a portfolio in a falling market, it is also the one asset class proven to lose money to inflation over the long term.

A focus on financial planning for the future, however, can be a growth opportunity after divorce, both in the metaphorical sense and in terms of your net worth. The financial markets can be your friend. That may be difficult to believe, particularly at times when stock market volatility is an everyday headline, but the facts are clear: the US stock market is one of the best investments you can make. History of the stock market has shown investing long-term is a strategic way to financially survive, even with volatile markets.

You Don’t Have to be a Financial Expert

When you decide to divorce in a volatile market, you aren’t signing up to become a financial expert.   However, it is wise to hire one.   During difficult market times it can be very scary but enlisting a Certified Divorce Financial Analyst or CDFA who is well versed in both the details of a divorce financial division and stock markets can be very helpful.  Many CDFA’s are experienced financial planners and advisors who have been through their own divorce and understand what you are going through both professionally and personally.  These professionals understand the markets and investing.  They are also trained to work specifically with divorcing couples and individuals and understand how divorce finance works.  These professionals can help you as they only focus on the finances a divorce case, and will work alongside you and your divorce attorney.

If you have questions or concerns about the financials of your divorce, schedule a call or video conference with us today to get the answers you need.

Divorce Financial Planning – Top 3 Strategies

Divorce Financial Planning – Top 3 Strategies

Divorce can really mess with your mind. I know because I’ve been there. It is like my brain was removed from my head and placed beside me for about a year. (It does come back!) The intelligent together woman that I once was turned into an emotional, brain-fogged, unorganized basket case. I tried very hard to keep it together, but I was not at my best. I felt paralyzed and incapable of coherent thought when I very much just wanted to focus and plan for my future with my young child. Divorce financial planning in Texas would have been the solution.

What’s a person to do? First things first.

1. Know the Basic Finances of the Home

What’s your role when it comes to the family finances? Do you handle the bill paying? Are you “in the loop” on all your bank accounts or are you in the dark? What about investment accounts or retirement plans? Do you have any? If you’re in the dark, you need someone to help you turn the lights on – and FAST! This is where a Certified Divorce Financial Analyst or CDFA® practitioner can really help.

Has your spouse blocked you from your financial life?  If so, a CDFA® may help you shed light on the situation.  A good CDFA® can walk through your taxes and identify brokerage and bank accounts.  He or she can also walk through any financial statements you have and help you identify where assets may be hidden.  A Master Analyst in Financial Forensics or MAFF® a different type of professional who can help you forensically trace bank accounts or brokerage accounts to look for hidden assets.  There is help available – you do not have to stay in the dark.  One client brought in a box of papers from years of stuffing them in drawers and closets.  We found 3 rent houses and $100,000 in CD money!

If you and your spouse are cooperative, ask for statements on all your asset accounts and your most recent tax returns so you can find a CDFA® practitioner to help you out with divorce financial planning in Texas and bring you up to speed. A CDFA® professional is specially trained in the financial aspects of divorce and will be your best friend in this process!

2. Think About Your Future

This part will be hard but start thinking about what the next phase of your life looks like. Unfortunately, this has to happen at the same time that you are grieving what you THOUGHT the next phase was going to look like. But if you allow yourself some space, it can actually be healing and fun. You now have the chance to start over again.

What did you used to dream of doing that got lost while you were married? Is it time to go back to school? Maybe a cool downtown loft condo should replace that huge family home that you had to keep clean. Whatever you dream of, you will need your budget and financial picture top of mind. That way, if your dreams outsize your wallet, you know you have some serious planning to do!

3. Build A Single Identity for Yourself

Often through marriage all the credit cards, mortgages, loans, etc. are in the names of both spouses. All of those accounts will have to be closed or converted. Immediately open a checking and savings account in your own name to begin the process of establishing your own financial identity. Be sure to put some things in place while you’re still married because after the marriage is over, your credit picture may not be nearly as strong. Next, find a good rewards credit card to apply for in your name alone so that you will be assured of having access to credit after the divorce and maybe even during if legal fees are necessary.

These steps may seem small but they are valuable first steps to get you thinking financially and looking out for your future. You can get through this, and a little divorce financial planning in Texas help from a CDFA® friend is a great place to start.

Lets Just Live Together

Lets Just Live Together

We have 5 children in our blended family and now the first of them is about to hit his 20’s and looking for Mrs. Right, I’m concerned!!! Millennials and Generation Z young adults could be the first generations of children-of-divorce. By 1983, all but 2 states had adopted no-fault divorce laws and over the next decades, the divorce rate rose to our now norm of about 50%. That resulted in many of those kids watching their parents’ divorce and suffering the emotional consequences that often accompany that. When you really consider the early years, there were few resources available to couples and families on how to go through the process in the most humane way. But let’s face it, even with the resources today, there are still plenty of ugly divorce tales out there.

So, for a lot of these kids, as they grow past their 20’s and into their 30’s, a very interesting trend is persisting. The divorce rate, the number of divorces per marriages, continues to rise but the actual number of divorces each year is dropping steadily. Why is this? Because young people are not getting married! They are choosing instead to be in serially monogamous, long-term relationships, often including children and joint home purchases, but forgoing the tradition of a recognized marriage. I understand. They don’t want to go through what their parents went through so the heck with marriage! However, the result of this when life doesn’t go as planned can be disastrous. No burden of marriage also means no protections of marriage.

Consider this: Josh and Beth have been together 4 years and decide to have children. They agree that Beth will stay home and care for the kids while Josh finishes his degree and works nights to support the family. Once he’s done and gainfully employed, the kids will be a little older and Beth will then go back to school and finish her degree.

Well, life happens, and three years into this fabulous plan, Josh is about to graduate and drops the bombshell on Beth that he’s been having an affair with a fellow student. He’s in love and just can’t go on like this. He’ll be a good dad to their children but he’s leaving her. (Didn’t see it coming, did you?) Oh, and by the way, last year they bought a home but since Beth had no income, they didn’t want her low credit score to drag down their interest rate, so the house and mortgage are in Josh’s name.

So, what’s Beth entitled to?  She’s like entitled to child support. The house was purchased by Josh and now that Josh is about to finish school and have a great job he can move on with his life in house. But they had plans! They had an agreement and she sacrificed her education to pay for his! Too bad. Had they been married, she could have been entitled to half the equity in the home, possible reimbursement for half of his education expenses and a portion of anything they acquired during the marriage. But boy, isn’t she lucky that she doesn’t have to go through a divorce? Josh kicked her out a week later and she and the kids had to move home with her parents.

Now, Texas does recognize common law marriage, but you will likely need an attorney to determine if you are married or not. What does that mean for Josh and Beth? It means Beth hires an attorney to prove they were married while Josh hires an attorney to prove they were not – after they fight about being married or not they then go on to fight over the house, the debt, the kids and anything else they own. What does that sound like? It sounds like the litigated divorce the parties set out to avoid in the beginning by not legally saying “I Do”.

This is SO REAL!! We highly encourage young people who wish to cohabitate take the time to visit an attorney to walk through the legal ramifications of this prior to moving in together. A simple Cohabitation Agreement can change many things. There are free ones available all over the internet or you can visit a family law attorney for more specific advice pertaining to your set of facts. Never move in with someone without one! It could end up saving you your entire financial life.

Financial Issues in Gray Divorce

Financial Issues in Gray Divorce

Few things savage your personal finances more than divorce. The closer you are to retirement, the worse the damage.  At Divorce Strategies Group we have seen couples who planned their retirement to look one way but now the same money for one retirement has to work for two.  Financial planning for anyone facing divorce is important but vital for those who are closer to retirement.

The divorce rate for Americans over age 50 has doubled since the 1990’s.  In 2015, for every 1,000 married persons ages 50 and older, 10 divorced – up from five in 1990, according to data from the National Center for Health Statistics and U.S. Census Bureau.   “Especially in a gray divorce, you have only one shot to get it right,” says Diane Pappas, a divorce financial analyst in the Boston area. “The husband and wife have to understand their expenses. The only way to live within their means is to understand what they’re spending and how much income they will have.”

What’s more, women are disproportionately affected financially by divorces: The average woman sees her standard of living decline by 45% after a split; the average man sees it go down 21%.   Why do women fare so much worse? Carol Lee Roberts, president of the Institute for Divorce Financial Analysts, which trains people in divorce financial planning, has seen many splits where the man takes the retirement account and the woman gets the house. The result is the man receives assets to help fund his retirement and the woman is saddled with the maintenance costs and property taxes of a house.  “Often keeping a house, or any large asset that isn’t giving you an income stream, isn’t the best idea,” Roberts says.   Women who stay home to raise children also often pay a Social Security penalty in retirement. If they didn’t work enough to qualify for benefits on their own, they receive half the Social Security benefits of their husband if married 10 years or more.

Health insurance is another big area of impact when couples split.  Many people receive employer-sponsored health coverage through their spouse’s employer, and they often lose it in divorce.  “The No. 1 issue that keeps people up at night is health insurance,” says Jennifer Failla, an Austin, Texas, divorce financial analyst. People losing employer-sponsored insurance due to divorce can get coverage for up to three years through a federal program called Cobra, but it is expensive.  We at Divorce Strategies Group help clients find private health coverage options and we review COBRA options.  Often, you can find less expensive coverage but we must review the benefits.  In addition, we have to review meds, cost of regular doctor appointments and any other special needs each client may have.

Even upscale couples feel the pinch in a split-up. Justin Reckers, a divorce financial analyst in San Diego, handled a case where the main source of income, the husband, earned more than $500,000 a year. The 54-year-old wife had quit working seven years earlier to raise their children. She received roughly $3 million in assets as part of the divorce settlement, enough to give her $7,000 a month for life after taxes, but that pales in comparison to the $15,000 or more a month the couple was spending before the divorce.

If you are considering divorce and want to know if you can successfully divide one household into two financially, call Divorce Strategies Group for a Strategy Session. If you have already filed for divorce and want a financial advocate, contact us for a complimentary phone consultation.   Our goal to help educate our clients and provide peace of mind.  You only have one shot to get this right, be sure to have the right people on your team!

Mediation versus Court in Divorce

Mediation versus Court in Divorce

“I’ll get my day in Texas divorce court!”  …….   “The judge won’t like what you did!”   ……..   “I’m going to spread your dirt all over the courtroom!”

We’ve all heard someone say these things. Guess what…You really don’t want your day in court! Here’s why:

Expensive Legal Fees

The longer you drag out the process, the more your estate will suffer. You could spend $50,000, $60,000 or more on the divorce process and that is less money for you to divide! Wouldn’t you rather use that money for…hmmm…ANYTHING ELSE?? Texas divorce court costs so much money because there is so much preparation. Court is war. You want your attorney (or lead warrior) to be fully prepared which requires time and information. We’ve seen multiple families spend $50,000, $60,000, $100,000 or more on their divorce.  Fighting just to “get him” or “nail her” could likely just transfer your kids college funds into your lawyer’s kids’ college funds without much for you to show for it.

Time in “Limbo”

Divorce is beyond painful. I know!! I’ve been there. I’ve sat in front of the judge and even though I “won” that battle, the war was lost by everyone in our family.  It was excruciating. I know there could have been a better way to achieve the same goal without the long, drawn out battle which cost us so much effort, time, energy and hurt our child. As long as you are in the process of divorce, it will be impossible for you to begin the process of healing and moving on with your life. Ask yourself how much time you really want to spend in this “limbo” state.

A Stranger Deciding the Future of your Family

The stranger in the black robe that has never met you, your spouse, or your children will be deciding your future and more importantly your children’s futures! To make it worse, they’re basing these decisions based on a fraction of information they’ve been given about your life…and then a fraction of THAT is what they’ll actually consider relevant. Frightening!

Mediation

In most Texas counties, you will be required to attend mediation before the court will hear your case. For the reasons stated above, embrace the idea of creating solutions for your future that will work for both of you. This is your chance to keep control of what you really want while creating a cooperative environment of giving your spouse what’s important to them as well. There is a solution – it may take hours to get there, but there is a solution. You only need the right people to help you find creative settlement options.  You need a strong attorney and if your estate is of any significant size and/or you are middle age or older,  you’ll need a financial expert helping you as well.

Preparing for Mediation

Your attorney.

Your attorney is your strongest ally and support. They are there for legal counsel and guidance.  You hired them, now trust them! They know the law, the court you are in, and have walked through thousands of divorces before you.

A Certified Divorce Financial Analyst or CDFA®

While attorneys know the law and the courts, a CDFA knows divorce finance and tax. We are financial advisors specifically trained to work with divorcing clients.  I’ve been the client so not only do I understand the work professionally, I understand it personally.   When you have property, investment accounts, savings accounts, retirement accounts, etc., it’s important to realize how you split things today will have a significant effect on your future.  We have saved clients thousands of dollars in tax savings, helped create win-win solutions, and provided peace of mind by using the settlement options in mediation to create financial plans. We help you by working out those details in mediation before you sign an agreement.   Leave mediation knowing you made informed financial decisions and with a clear vision of your future.

If you’re facing Texas divorce court, call Divorce Strategies Group!!  You only have one chance to get the estate division right – having a financial expert on your team just makes sense!

How to Keep Your Credit Score Healthy in Divorce

How to Keep Your Credit Score Healthy in Divorce

Concerned about your credit rating in divorce in Texas? You have good reason to be. Good credit helps with more than borrowing – it can factor into everything from renting an apartment and getting a cell phone, to landing a job. Lenders, landlords, utility providers, and employers can all review credit reports when making decisions about you as well.

It’s important to work closely with your attorney and a divorce focused financial expert as you walk through the maze of financial issues in divorce in Texas which includes keeping up with debt payments in the divorce process and determining the best financial action to take in divorce in Texas and after the divorce.  Many find it helpful to walk through financial questions prior to mediation or settlement with a Certified Divorce Financial Analyst.

Let’s unpack what a FICO® Score is, and then walk through six practical tools to build or keep your credit score high.

A FICO® Score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. Lenders can request FICO® Scores from all three major credit bureaus (Experian, Equifax, and Transunion). A good FICO® Score means better financial options for you.

There are many reasons why your score may change. FICO® Scores are calculated each time they are requested, taking into consideration the information that is in your credit file from a particular credit bureau at that time. So, as the information in your credit file at that bureau changes, your FICO® Scores can also change

Not that you understand what a FICO® Score is, here are six factors that affect your credit score.

1. On-Time Payments

This is your track record for paying bills on time. This has the most impact on your score – in fact a whopping 35% of your score is simply from on-time payments. Missed and late payments, including the number of late payments, how late they were, and how recently they occurred, are important to FICO® Scores.

Creditors report your payment activity—good or bad—to the major credit bureaus, typically every 30 days. A single late payment won’t likely hurt your score, especially if it’s a one-time occurrence. Multiple late payments do affect your score though. Missing a payment on any bill affects your credit score negatively, including credit card bills, student loans, mortgage loans, and car loans.  Other types of payments, such as your utilities or phone bill, don’t affect your credit score until multiple late payments cause the provider to turn your debt over to collections.

2. Credit Usage

This is how much of your credit card limits you’re using. This affects 30% of your credit score. FICO® Scores weight the balances of mortgage and non-mortgage installments loans (such as auto or student loans) against the original loan amounts shown on a person’s credit report.

That debt, also called your credit utilization ratio, is calculated by comparing how much debt creditors have extended to you—AKA your credit limit—to how much of the credit you’ve used. Say you have no loans and a single credit card with a $200 balance and a $1,000 credit limit, your credit utilization rate is 20%. It’s best to keep your credit utilization to 30% or less. But, keeping it at or under 10% is even better.

The reason debt has such a large impact on what affects a credit score is that it identifies whether or not you’re a high-risk borrower. Naturally, someone carrying less debt is a less risky borrower than someone who’s using quite a bit of his/her credit limit(s).

3. Average Age of Credit

This is the average age of all your open credit cards and loans. FICO® Scores consider the age of a person’s oldest revolving accounts. The longer and older your accounts the better so don’t close those old credit cards if you don’t have to and keep the ones in your name alone in your divorce. Keep them open and pay them off each month. Credit age affects 15% of your overall score.

When it comes to the age of your credit accounts, there are two main factors that a lender looks at:
• The first is the age of your oldest account.
• The second is the average age of your combined accounts—calculated by adding up the age of each account and dividing it by the number of accounts you have.

4. Total Accounts and Account Mix

The more credit cards and loans you’ve had, the more lenders trust you. Your credit mix accounts for 10% of your score. There are two main types of credit accounts that go into that mix, revolving debt—AKA credit cards—and installment debt—AKA loans, such as car loans and mortgage loans. Your credit score is happiest when you have a good mix of both.

5. Credit Inquiries

A “hard’ inquiry is when a lender checks your credit report. FICO® Scores look at the number of times a person applies for credit since people who are actively seeking credit tend to pose more of a risk to lenders than those who are not. Consider the impact of inquiries on your credit score before applying for any promotional offers.

The two types of credit inquiries as soft inquiries and hard inquiries. Soft inquiries don’t show up on your credit report. A hard inquiry does show up on your credit report and can lower your score in increments for some time before your credit begins to climb again. The fewer hard inquiries your credit report, the better. Hard inquiries, like account mix, make up about 10% of your credit score.

6. Odd Items

Reporting Errors

Errors can end up on your credit report and are items that are flat out inaccurate. They can happen from data entry mistakes or even identity theft. Watch from them by checking your credit reports annually.  You can run one free credit report each year from each of the three major reporting agencies: Experian, Trans-Union, & Equifax at annualcreditreport.com. Another good option is Credit.com which includes a free credit report card that shows where you stand and what you can do to improve your payment history, debt usage, credit age, account mix and credit inquiries.

Other sites for a free credit score is creditkarma.com and creditscore.com The data won’t be exact, but it will give you a rough idea of where you stand.

If you do find an error on any one of your credit reports, be sure to dispute it with the credit bureau(s) reporting the error. If you have multiple errors, you need to dispute each one separately with the bureau reporting the errors.

Parking Tickets

Leave a parking ticket unpaid long enough and the city will likely send it to collections. Because collections involve outstanding debts, they can appear on your credit reports and do big damage to your credit scores.

Utility Bills

Similarly, unpaid utility bills can affect your credit score numbers negatively, when the debt is sold to a third-party debt collector. The third-party collector can report the account to the credit bureaus.

Medical Bills

Medical debts can directly affect your credit if you’ve used a credit card to pay for them. They can also indirectly affect your credit if your medical bills go unpaid, since health care providers also send unpaid bills to collections after a certain period of time, usually between 90 and 180 days.

Know though that medical debts are treated differently by most credit scoring models. Some newer models ignore paid medical collections entirely. And because of a 2014 settlement between the three major bureaus and 31 state attorneys general, since 2018, medical debt is not reported until 180 days after it’s incurred.

Delinquent Child Support

Unpaid child support is considered debt. And it can be reported to the credit bureaus by the municipality or agency responsible for collecting the payments.

Paying Off a Loan

If you pay off your auto loan and it’s the only installment loan you have on the books, your credit score can take a small hit. It sounds backward, but it’s how credit works.    Closing a loan can also negatively affect your credit utilization rate if your remaining loan balances are high.

Closing a Credit Card

If you close a credit card you lose a part of your credit limit and your credit utilization rate changes—and not for the better. Your utilization goes up. And that can mean your credit score goes down.

Getting a new Cellphone Plan

Cellphone providers also often pull your credit when you sign up for a plan, which again can be a hard inquiry on your report.

Not Paying Your Taxes

Leave Uncle Sam’s annual bill unpaid long enough, and it might file a Notice of Federal Tax Lien against you. And a lien can seriously damage your score. Learn more about tax liens and how they affect your credit.

Forgetting to Pay Your Rent

For a long time, on-time rental payments did nothing for your credit. And, in many cases, they still don’t. But, the credit reporting industry is moving to include rental data on certain versions on your credit reports. And the industry lets landlords report payment data. Still, even if a lender or service provider isn’t looking at that data, a missed rental payment can wind up going to collections. And the collection agency might report your debt.

The effect can be positive though too. You can even ask your landlord to report your timely payments to help your score.
Also worth mentioning: Landlords tend to pull a special version of your credit report when you apply for a lease, so missing a rent payment could cost you a home or apartment, even if it doesn’t mess up your credit score.

That Old Gym Membership

An unpaid gym membership can wind up in collections, so it’s important to cancel the one you’re no longer using. Don’t just close or cancel the card you were using to pay the membership. Cancel the membership itself.

Bank Overdrafts

Checking and savings account information isn’t included in traditional credit reports. Even so, if you opt for overdraft protection tied to a line of credit and don’t resolve the overage, you could wind up hurting your credit score.

If this seems like a lot to keep up with, we understand.  The emotions and family issues in divorce in Texas can be overwhelming alone, then add financial stresses and the process can be gruesome.  Having a strong team to help you with the financial issues in divorce in Texas can provide peace of mind.   For help with keeping your credit score up, building a credit history or financial assistance in general contact us to schedule a strategy session today!

Oh No… the Holidays are Here

Oh No… the Holidays are Here

In the month of November thus far, we have had no less than 15 new consultation meetings with clients who know their marriage is over and are wondering when to start the divorce process. Many of them decided to wait until after the holidays for the children or so that their extended families would have one last holiday together. Mix that with the number of couples we are currently working with who are in the divorce process and the multitude of couples we helped walk through divorce and are finalized so far this year. In our little universe that is a lot of people dealing with sadness this holiday season, I can only imagine the numbers outside our little bubble. Add that pain to the stress and strain of trying to maintain the status quo and all the extra pressures of the holidays – that is tough! Although there are no magical solutions to cure the holiday blues, here are 10 things you can do to make it easier to cope.  I used many of these tools during my own divorce which extended through a holiday season and the first year after the divorce.

1. PLAN AHEAD

Plan to do something that is fun, relaxing, and as stress-free as possible with people you really care about. When I was in the midst of my divorce I planned a Christmas trip to my brothers’ house in northern Vermont. That was literally the best holiday I had experienced in years. It was magical. I was away from my home and the stress of the divorce. I had my child that year for Christmas and was surrounded by people who loved me. I had to plan that with my family and my attorney prior to December 25. Even if you don’t have your child this year, plan to be with family or friends whom you love.

2. DO SOMETHING TOTALLY DIFFERENT

If the holidays are just too painful and the reminders are everywhere, consider a vacation that allows you to “escape ” the painful triggers. If you have never been on a cruise for Christmas or been to the Bahamas – this may be the year. I had a friend who starting going to the Grand Canyon each year for Thanksgiving and then Vegas each year for Christmas (the family-friendly part of Vegas and they were out by New Years). If travel is not an option, volunteer someplace for people who have nothing. That will not only help you forget your situation for a while, but you’ll also feel good about the help you are giving to others.  We have made dollar store Christmas stockings before and handed them out to the homeless.  Anything to help others will help you!

3. CREATE NEW RITUALS AND FAMILY TRADITIONS

While you may want to hold on to some of the past traditions, it’s a good idea to create some new rituals with friends and family. We started going to see different “wonderlands” with holiday lights and we took a second trip back to my brothers’ house in Vermont. We also started going to a new church and celebrating with their traditions.  We adopt a child through the church each year and shop for them.  We still go look at holiday lights but we added a Starbucks stop for hot cocoa along for the tradition.    We created new Thanksgiving traditions by blowing off the traditional food options and eating Chinese every year with friends.  You could even do something around each family member’s favorite foods and let the kids help cook.

4. REASSURE KIDS THAT HOLIDAY CELEBRATIONS WILL CONTINUE, BUT IN A DIFFERENT WAY

Children can help create some of the new holiday rituals and traditions. Take time to brainstorm with your children about new ideas for celebrating. I googled holiday traditions and tried out several with my daughter and we found a few we both enjoyed. Invite them to be a part of the new experience and let them find new traditions. Try different things – just stay positive in front of them.

5. ASK IF YOU ARE ACTING “IN THE BEST INTEREST OF THE CHILD”

Decide ahead of time how holidays will be divided. Talk to your attorney about this if you are in the midst of the divorce. This is one area where you want to speak to your attorney as soon as possible and solidify plans for pick up/drop off and days and times you have with minor children so there are no surprises.  The structure of knowing when I had my child the year we were separated provided me a lot of comfort and the ability to plan.   Your attorney will know how to make that happen, just talk to him or her as soon as possible.  I think it also helps to reassure kids that you will be OK while they are with the other parent.

6. ASK FOR HELP FROM SUPPORTIVE FAMILY AND FRIENDS

Rely on a healthy support system if you are feeling isolated, lonely or depressed. Tell your support people what you need from them (companionship, understanding, compassion, listening, etc.) My family was so helpful during this time and my friends were even more so. I could not have survived that first year of “firsts” without them.  I also love Divorce Care.  This group of understanding, compassion people helped me tremendously during my divorce and after.

7. BE REALISTIC

“Picture perfect” holidays are usually just an illusion. Have realistic expectations about the holiday season, especially the first year.  Hallmark movies may not be the best viewing options either!

8. TAKE CARE OF YOURSELF

Get the proper amount of sleep and exercise and eat healthy in order to maximize your ability to cope. It’s easy to overeat or party too much to medicate your pain, but in the long run, it creates more problems. Walking daily if you are not already working out can also do wonders for you.

9. SCHEDULE TIME FOR REST, RELAXATION AND NURTURING

Give yourself a break. You deserve it!  A bubble bath, a long-overdue facial, a hair cut – anything to pamper yourself and nurture yourself.  We have a client who recently took a woman’s only weekend spiritual retreat and it was life-changing for her.  If that’s not possible, at least a good pedicure where you are not rushed and can enjoy the “me time” and the pampering.   For guys, a guilt-free afternoon of golf with your best buds or a long overdue fishing trip.

10. ONE DAY AT A TIME – ONE HOLIDAY AT A TIME

It will get easier. It will get better. It will hurt less. Right now, just concentrate on one thing at a time and the next right action.  Just one foot in front of the other, one step at a time.

If you are feeling overwhelmed, anxious, depressed, or stuck, GET PROFESSIONAL HELP. Therapy can provide a safe, supportive environment in which you can gain insight, learn problem-solving skills and find solutions to dealing with the anger and pain of separation and divorce. If you need help finding a therapist that works well for you, contact us for a referral at www.divorcestrategiesgroup.com or 281-210-0057.

Life Insurance & Divorce

Life Insurance & Divorce

Many of our clients come to us before divorce mediation with some type of life insurance. The question we hear weekly is “Can I keep the life insurance policy in the divorce?”  Well, it depends.   You can keep many types of contracts, but you need to know what you own before you decide who is keeping what.   There are many variables in a life insurance contract and other questions you also need answers to.  Are you the owner? Is there cash value? Can you remain as the beneficiary when you are divorced?  It’s important to understand the parties and their rights in a life insurance contract, how your state treats ex-spouses, and the basic types of contracts.

The parties involved

The Owner This is the person or entity who has control over the policy, can gather information on the policy from the carrier and has control to change beneficiaries. This person or entity has total control over the policy and unless blocked, can change the beneficiary at the insurance company level.

Annuitant – This is the person whom the policy is based on. If this person dies, a death benefit is paid. Often, the owner and annuitant are the same person, but not always.

Beneficiary – This is the person who receives the death benefit if the annuitant dies. A primary beneficiary receives the funds first. If this person dies before the annuitant or with the annuitant, the contingent beneficiaries receive the funds. In Texas, per Texas Family Code 9.301 in the situation of an ex-spouse who has not been re-designated as the beneficiary after the divorce, the ex-spouse will be skipped over and the other primary and/or contingent beneficiaries will be paid.

Paying a death benefit to the ex-spouse

In Texas, if a spouse was designated as a beneficiary before the divorce and not re-designated after divorce, and not designated in the divorce decree as the beneficiary of the policy, he/she is written out and/or skipped over by the life insurance company per Texas Family Code 9.301. For example, Tom purchases a 20-year term policy for $2 Million and named his current wife Susan as the primary beneficiary and their three adult children equally as the contingent beneficiaries. Seven years later Tom and Susan divorce and the policy remains unchanged.  It’s a term policy worth nothing so it was, honestly, just forgotten in the divorce negotiations.  It was not addressed at all in the divorce decree.  A year after the divorce, Tom dies suddenly of heart failure. In this case, Susan may not receive the death benefit, the children may instead.

If Susan had been written into their divorce decree as the beneficiary of the policy the insurance company would review the decree and likely pay Susan, however, the interim stress and strain could all be thwarted with a new beneficiary designation with the insurance company after the divorce.

Irrevocable and revocable beneficiary

Even if the ex-wife is re-designated as the beneficiary after the divorce, the owner still has control to change a regular, revocable beneficiary – no matter what your divorce decree states. We strongly suggest the ex-spouse make you an irrevocable beneficiary if you want to remain the policy beneficiary. As an irrevocable beneficiary you cannot be written out as beneficiary without your consent.  For example, let’s assume instead of dying a year after the divorce, Tom remarries Daniele.  Tom makes Daniele the primary beneficiary after they are married, even though the Texas divorce decree states that Susan should remain primary beneficiary of the same policy.  Then a year after marrying Daniele, Tom dies. We are still within the original 20-year term period only now the insurance company has a designation from Tom to pay his current wife Daniele, so they will likely pay Daniele.   The divorce decree states that Susan should remain the beneficiary – so at the very least there is a fight on Susan’s hands and she may not in the end receive the funds at all.  Had Susan and her divorce attorney mandated that Susan be designated the IRREVOCABLE beneficiary, there would be no confusion.  Tom could not have made Daniele the new beneficiary or he would have had to open a new policy for Daniele alone.

Types of policies

Term Life – This is simply a term life insurance policy meaning you pay a certain premium for insurance for a certain term or period of time. If the insured dies within that term period, the beneficiary receives the death benefit. If the owner stops paying premiums, the policy lapses and is gone. There is no cash value with a term policy. The policy is worth nothing today and only worth something if the annuitant dies. This policy should be on your divorce estate spreadsheet, but the value is $0. It’s the death benefit that is worth something and conversely, costs something each month, and it should be discussed in the divorce negotiations especially if you still have minor children. While child support is typically an obligation of the estate, that obligation would be far less than a million or multi-million term life policy.

Whole Life Policy – This is permanent policy that pays either a dividend or a set interest rate. As with term life, regular premiums are due with whole life policies for a predetermined period. Whole life can grow over time, but it is costly in the early years. You pay a premium for the cost of insurance in the earlier years only to have that cost not rise in later years. These policies have cash value and should be listed with that value on your divorce estate spreadsheet. The policies should be discussed and negotiated for in the divorce. There is a monthly premium for these policies as well and that should also be discussed and negotiated.

Universal Life Policy – This is a permanent policy that, like whole life, has cash value. Universal Life policies are more flexible as there is no set premiums due. There were illustrations ran when the policy was purchased with what the parties agreed to pay, but no mandated premium payments. If you don’t pay the premiums, the policy will use the cash value to pay the premiums. If no premiums are paid, it will lapse only if there is insufficient cash value to pay premiums. Universal policies utilize some type of underlying investment – the investment can be a fixed rate, a mutual fund type of account in the markets or an indexed policy tied to the markets but unable to technically go below 0% if the markets have a down year. Most of the policies we use with our investment clients through our sister firm, French Financial Group, are universal life policies are they are more flexible, have better options for growth and can be morphed to use for either tax free cash later in life for the owner or death benefit for their heirs. This is certainly an asset to go on the estate spreadsheet to be discussed and negotiated.

An in-force illustration can be run on the universal policies and the whole life policies. These illustrations will show how long you have, based on performance and your specific contract parameters, to keep the policy and use the cash value for premiums. These illustrations take several days to run, so order them well before your mediation date.

If you have life insurance or other financial questions call us. We offer strategy sessions to help you understand what you own and develop a plan for your future.

Divorce Settlements Gone Wrong

Divorce Settlements Gone Wrong

John and Susan are very typical clients we see in our office regularly. They are educated.  John makes a good living as an MBA who works downtown at a financial firm. Susan was a stay at home mom for a while but has a degree in marketing and has recently re-entered the work world.  She currently makes a fraction of what John makes, but that is expected to grow over time.   They are knowledgeable about what they own and what they owe. They, logically, assume dividing their estate will be simple. How many times have we heard; my divorce case is simple? While logically it may seem simple, it’s usually not in reality. In addition, tax issues may slant a 50/50 division into more of a 60/40 division – which can cause very hurt feelings a few months after the divorce. Their mediation in Texas could have gone very different ways.

Here is an example of a ‘simple’ divorce that proves to not be so simple and how this 50/50 division went very wrong.

hide assets in divorce

The Estate

John and Susan own the following:

Primary Home: $750,000 Value, Mortgage Balance $350,000 = Net Equity $400,000
Secondary, Vacation Home: $400,000 Value, No Mortgage
John’s 401k: $450,000
Checking & Savings: $50,000
Total Net Assets: = $1,300,000

financial audit of divorce settlement

Their Solution

Their kids are grown, and Susan determines that she cannot really afford the primary home on her own. So, John takes the primary home and Susan takes the secondary home. Susan is 53 and wants to stay close to their kids in Texas so she decides to sell the vacation home to purchase her own home. John initially decides to stay in the primary home for a few more years and then sell it down the road to downsize.  This is the logical division of assets the couple decides to do:

John: Primary Home: $400,000 Net Equity
John: Half the 401k $225,000
John: Half the checking $25,000
John Total: $650,000

Susan: Secondary Home: $400,000 Net Equity
Susan: Half the 401k $ 225,000
Susan: Half the checking $25,000
Susan Total: $650,000

A perfect, 50/50 split right! No problem. This is simple. Well, it is on paper, but this 50/50 is really a 62/38 division after taxes.

The Reality

John decides he doesn’t want such a big house to upkeep, so he sells it right after the divorce is final.   John sells the primary house for $760,000. He pays off the now $345,000 mortgage and pays 8.5% ($64,600) in closing costs and realtor fees for a net equity of $350,400. They purchased the house 10 years prior and put $300,000 down the home and added a pool for $50,000. His net cost basis in the home is $350,000. He has zero tax liability as he has $250,000 exemption as a single person.

Susan sells the vacation home and purchases a new residence for herself. She is only 53 so she is going to take advantage of the opportunity to withdraw funds from her spouses 401k in divorce without the extra 10% penalty, but she still owes tax on the withdrawal.  She does this for a financial safety net while she re-establishes her career. Susan sells the secondary home for $405,000. She also has 8.5% in closing costs or $34,425. The property had been purchased for $170,000 and $30,000 was put into a new back patio so her basis in the home is $200,000. Susan assumes her gain of $170,575 is well under her personal exemption amount of $250,000. When tax time comes around the next year, her accountant looks at her with big eyes and breaks the bad news. The personal exemption is only applicable to a primary residence and you must live there for 2 years in order to use it. Since she didn’t, the entire $170,575 is taxable at 15% netting her $144,989. Let’s not forget, Susan doesn’t have the income that John has so she takes $100,000 of the 401k and moves it into cash and the other $125,000 she moves into an IRA for herself. The $100,000 is treated like ordinary income and taxable to her. She owes $28,000 in taxes off the 401k funds she took in cash.

This is what each party really kept in the divorce:

John: Primary Home: $350,400 Net Equity
John: Half the 401k $225,000
John: Half the checking $25,000
John Total: $600,400

Susan: Secondary Home: $144,989 Net Equity
Susan: Half the 401k $125,000 into an IRA plus $72,000 cash from the 401k, the remaining $28,000 goes to the IRS this year for taxes
Susan: Half the checking $25,000
Susan Total: $366,989

Total Tax Effected Estate: $967,389

The net effect is not a 50/50 – within one year of the divorce, given the withdrawals that were taken, they had a net tax effected estate of $967,389. John receives $600,400 or 62% while Susan receives $366,989 or 38%.

There are, typically, no do overs in the final estate division. If Susan had known what was going to happen with the primary home and the secondary home net of taxation – she may have not been so eager to agree to this in a mediation in Texas. Further, if she knew the tax ramifications of taking funds out of the 401k, she may have discussed taxation a little further before determining the 50/50 division or have asked for support of some kind to offset this taxation hit in today’s dollars. A Certified Divorce Financial Analyst could have really helped uncover these issues before a Mediated Settlement Agreement was signed in mediation in Texas or before the divorce negotiations were finalized.

Your Reality

If you and your spouse are entering a do it yourself divorce, we commend you on trying to hash this out cooperatively rather than in a long, drawn out battle. However, it’s important to consult with professionals before signing anything. It is wise to review your estate division with a Certified Divorce Financial Analyst who can walk through financial pitfalls, such as taxation, in your divorce settlement. At Divorce Strategies Group we understand divorce financials, we understand divorce mediation in Texas, and we can help. Call us at 281-210-0057 or schedule a strategy session today to get started!