Both you and your spouse need it. You probably don’t have enough of it. Neither of you should lose sight of it as you negotiate the terms of your divorce.
Here are just a few of the reasons you need cash:
- Divorce costs money.
- You may need a new place to live, or maybe you’re going to end up paying all the rent or mortgage in the place where you and your spouse once lived together.
- One of you may need to pay cash to the other to settle up your property division.
- You need to eat.
- Ditto for power, phone, cable, etc.
- Your job performance probably will suffer during divorce, meaning your income may drop.
- You may need to go back to school.
- You may have moving expenses.
If you and your spouse have bank accounts with generous cash in them, I congratulate you. You’re most unusual.
Now let’s talk about the rest of us. I’m assuming that you don’t have cash lying around and you need to produce it somehow. How?
You can sell the house. Depending on how much equity you have in the house, it may be a source of cash. The difficulty with this, of course, is that you have to find another place to live. Compare your mortgage payment with what you would pay to rent another place. Is rent more than your mortgage payment? Is there enough of a need for cash to you to take on the higher payments for living space?
You can use a divorce lien. You can hold on to the house, and the one of you who is keeping the house can sign a promissory note to the other spouse, pledging the house as collateral. Click here to read all about it.
You can sell something else. You know what you have, how much you could sell it for, and whether you can part with it. I don’t. Sometimes people have assets in the forms of loans owed to them or settlements owed to them.
You can dip into a retirement plan. Retirement plans are a tempting and ready source of cash for many of us. Many 401(k) plans allow you to borrow against your plan balance, so that you end up paying yourself interest. As long as you really do pay it back, you won’t have to pay income tax or penalties on the amount you borrow. But it’s distressing to see how few of us actually repay the amount we borrow from our 401(k) plan. If you borrow and don’t pay it back, you’ll be deemed to have taken an early withdrawal on the money. That means income taxes as well as a 10% penalty.
One note about distributing cash in a retirement plan. If a participant in a 401(k) plan distributes cash to his or her spouse in divorce by means of a QDRO, neither the participant spouse nor the recipient spouse will be liable for the 10% penalty. The recipient spouse will be liable for income tax at his or her tax rates, but if his or her income is very low, income tax may not be much of an issue.
You can borrow from a friend or relative. People want to help you when you’re going through divorce, and one of your friends or one of your parents may be able and willing to help tide you over. You’ll have to decide whether you’re willing to ask for that help, or you may choose to wait for them to offer you the money. If they do, it’s probably better for both of you — as well as your friendship — to agree in writing on when if ever you are to pay the money back.
You can borrow from a commercial lender. This isn’t anybody’s favorite, but it may be your only option. And sometimes you just have to do what you have to do.
You can increase your income. This one is probably the hardest, and because it doesn’t involve sacrificing your future wealth, the most desirable. Can you get a raise? A promotion? A second job? A first job? Before you leap into this, remember that you’re at risk right now, just because you’re going through a divorce. Make sure you take care of yourself if you ratchet up your work schedule right now.