Divorce — Planning Ahead or Just Reacting?

health-care costsToday we welcome Guest Poster Jared Diamond. He’s not from New Mexico, so please understand he’s writing generally; he’s also not a lawyer. But the points he makes are good to consider. I have some additional thoughts that I’ll add next week.

Divorce: A Reactive or Proactive Animal?

Divorce and poverty often go together like Laurel and Hardy, but some forward-thinking financial planning can help you avoid that pitfall. Most people are well aware of the short-term and obvious financial consequences of divorce, but there are some long-term and hidden consequences as well.

Some attorneys give reactive advice – “if X happens, react by doing Y” – and that works very well in many situations: divorce can be so overwhelming that many attorneys do not want to overburden their clients with excess information. Others, such as Austin based divorce attorney Jim Evans have more success with a proactive approach – “proactively do Y to prevent X from occurring in the first place.”  For attorneys in the proactive school, financial planning for the future starts while the divorce is still ongoing.

Conserving resources

Because mediation is a good option to reduce direct and short-term legal expenses, many attorneys recommend mediation based on the short-term benefits alone. Proactive mediation also has long-term cost benefits: by increasing satisfaction with the outcome, mediation increases compliance and decreases future legal expenses on motions to enforce and other procedures. Because mediation has other benefits, such as decreased conflict and decreased stress, you are more productive and get more done at work and at home, and you take fewer sick days to deal with the emotional stresses and strains of divorce.

Mediation is not always successful, but it is nearly always at least worth a try.

Planning ahead

The reactive school says to get the best deal possible upfront, and deal with any longer-term financial difficulties if and when they arise. Part of the issue may be that some attorneys are not really interested in a long-term relationship with their clients, so there is a tendency to say “look at the favorable divorce property settlement I obtained for you; call someone else if something goes wrong later.”

Even the most basic financial planner knows that what is good today may not be good tomorrow and, in fact, sometimes it may be worth sacrificing a little bit today in order to have a better tomorrow. NPV (No Present Value) assets in a divorce are a prime example: home equity, stock options and retirement accounts to name a few. But these NPV assets are not magic beans that may be worthless; these NPV assets are very valuable in the future.

Home equity is a gold mine once the house is sold, or if the homeowner elects to take out a reverse mortgage later. Stock options may mature into very lucrative assets that can jump start a retirement or a child’s college education. And your share of a retirement account can help give you the financial security you deserve.

While the reactive school may be best in some situations (why bother formulating solutions to problems that may never be an issue?), a proactive divorce attorney is the best advocate for your family, both now and ten years from now.

Jared Diamond writes on a host of personal finance topics. Jared is a graduate of the Ohio State University with a B.A. in Economics and is an active blogger on a number of publications.