A Comprehensive Look
There is no way around it: legal fights can get expensive. It gets even harder to tackle that cost when we consider that no one plans for a legal challenge. Exactly zero people are setting aside funds to spend time in court arguing about whether or not they should be the one to have custody of the kids. It’s a daunting challenge to have to deal with. So, we’ve put this together as a comprehensive guide to walk you through the options that are available to you, even when your soon-to-be-ex tries to claim that the money in your joint accounts is “theirs, because they earned it.”
This is something you have to figure out. Once a divorce (or custody) complaint has been filed in the probate and family court, that case is going forward with or without you.
Using Your Own Assets
When a divorce (specifically) is filed, an automatic restraining order goes into effect that affects the use of assets in the marital estate. Specifically, the order demands that the status quo of everything be maintained as much as possible until an agreement is reached. Neither party can sell the house and keep all the funds to themselves, neither party can unilaterally drain all the accounts, close 401(k)’s, etc. Everything has to be run as usual, with one exception: You can use joint assets to pay for legal fees.
Now, this does have some caveats. A prime example of which would be taking a credit card for a business your spouse runs and then using that to pay for legal fees. If you legally would not be allowed to use those funds for personal use under normal circumstances, you likely cannot use it here. Likewise, dipping into a personal account that doesn’t have your name on it can also cause some problems even though the court may view the account as a joint asset subject to rules for distribution.
If you’re attempting to get funds together before a divorce has been filed, a general rule of thumb is that you shouldn’t use more than half of any bank account that you jointly share with your soon-to-be-ex. Trying to take everything before the complaint is filed can be problematic, and you may end up being ordered to return large amounts. If you have concerns about any of that, you should seek out a one hour consultation or similar session with an attorney to get everything lined up before you dive in fully. There’s no harm in a little preparation.
Just like individual or joint bank accounts, there’s nothing stopping you from using a personal or joint credit card during your divorce. There are some things to consider regarding joint credit cards. First, if you are just an authorized user of the card and not actually a named account holder, it can become really easy for your soon-to-be-ex to kick you off the account and shut your card down. Even if the court would technically prohibit them from doing it, you’d still have to go back and argue that after the fact while your ability to cover costs has been shut off. You should also be aware that debts are also subject to distribution rules just like assets are. You will likely be assigned responsibility for the debts you incurred on a joint credit card – you won’t be able to pass those off down the road to avoid paying legal fees.
Using Your 401(k) for Legal Fees
You are allowed to use your 401(k) to fund your divorce and pay your legal fees.
A 401(k) account isn’t going to be fundamentally different from other financial assets in the marriage. An automatic restraining order will go into effect preventing you from transferring ownership or liquidating the asset, but you can use the funds in it for reasonable expenses. You just need to be considerate of two things: if you are under 59 1/2 years old, there is an extra 10% penalty for early withdrawal on top of the taxes, and there may be some considerations in the scope of your divorce that need to be ironed out by your legal team.
With regards to the divorce considerations, because a 401(k) is one of the major assets subject to distribution, anything that you draw from the account might be considered a “pre-distrubution” of the asset. For example, imagine you have a 401(k) account worth $100,000 and you have drawn $10,000 from it to pay for legal fees. If your separation agreement orders a 50/50 split of the account between you and your soon-to-be-ex, the split could end up being $40,000 to you and $50,000 to your spouse – you already took that extra $10,000 out for your personal use. So it all balances out in the end.
Whether or not you should use your 401(k) is up to you, and it should maybe be used as a last resort because of the costs associated with it. Any amounts you draw will be taxed like regular income, and while you can make that withdrawal, divorce doesn’t qualify as one of the hardship exemptions to avoid the 10% penalty.
If you’ve landed in a spot where you feel this is the right choice for you, then you need to contact your plan administrator or check your account portal for withdrawal options. The plan administrator for your 401(k) may or may not be associated with the plan sponsor (almost always your employer) and should be listed on summary descriptions of your plan. If you do not have a copy of your summary description, reach out to whomever works in HR for your company. You are entitled to copies of your summary plan description by law.
Even though the word “loan” is in the name, a loan from your 401(k) is not like a loan from a bank. There is no “lender,” and there aren’t any checks on your credit score to determine if you qualify. More accurately, when you think of a 401(k) loan, you can imagine it as shuffling money from one pocket to another.
There are some rules you need to be aware of, however. First, there are usually some limits on the amounts you can borrow – typically no more than 50% of the account value or up to $50,000 (you need to check your plan documents for the amount you can borrow). Second, you must repay the money you borrowed within 5 years, with interest on top of it. The “interest” isn’t traditional interest either – its still your money. It’s just being moved from one pocket to the other. Third, repayments for the loan are also made with post tax dollars as opposed to pre-tax dollars that regular contributions could normally be made with. You may still be able to use payroll deductions for the loan repayment, however, which makes the payment straightforward and easy. If you don’t repay the loan within the term of your plan (no longer than 5 years), it will be considered a regular withdrawal and subject to penalties and taxes as appropriate.
A 401(k) loan is a bit more complicated in the scope of a divorce than a straight up withdrawal, so it may be good idea to talk to a certified divorce financial analyst (we have one on staff!) about what this means for your separation. You will also need to talk to your plan administrator about how to go about creating the loan.
Personal Loans and Credit Cards
Of all the options, this is likely one of the least desirable ones because you’re taking on additional debt during a tumultuous moment. Still, it’s one worth considering if you’re running out of options. The last thing that you want to do is run into a brick wall during discovery and be unable to proceed on your case when the stakes are whether or not you get custody of the kids.
There are some institutions out there that offer divorce specific loans. These loans will look at your potential distribution from the marital estate and then arrive at some loan value based on their assessment. Some of these lenders may require that any distribution be sent to them first so they can collect their owed fees (and interest) before distribution to you. If you happen to find one of these lenders, read the loan origination agreements carefully so you understand what’s required of you. They aren’t necessarily out to scam anyone, but they can work in some ways that are unexpected.
Beyond the burgeoning market of divorce loan lenders, you can also explore options with traditional lenders for personal loans. Most personal loans are going to function most similarly to an auto loan in terms and interest rates. Discover, for example, offers personal loans up to $35,000 with terms up to 7 years. Interest rates on personal loans can be a bit high, but compared to a credit card, they can be an outright deal. Very often, you can secure a personal loan from the institution you have your personal banking with very quickly. They will already know what your assets and pay are, so they likely have pre-approved offers waiting for you so they can get you engaged with another product at their bank.
If a personal loan isn’t appetizing, you can also consider utilizing credit cards. The drawback here is high interest rates over a person loan, but, you might be able to score some deals depending on the card that you’re using. It can be a good idea to look for credit cards that have 0% interest offers to stave off that higher rate while you organize your finances. Most divorces will be wrapped up around the same timelines that interest free periods expire, so you that can work to your advantage with any distributions you might be seeing to pay off your bills.
Asking the Court for Fee Awards
To be clear, this is a LONG shot option and you should not hang your hat on it. Anytime you engage in a legal challenge, you need to assume that you are solely and entirely responsible for paying your legal fees. However, it is possible to receive an award of fees from your soon-to-be-ex through a court order.
The way to do this is through a motion “Pendente Lite” (Latin for “pending litigation”). What this motion will do is ask the court for financial relief while the litigation is being resolved. If successful, you will receive a monetary award from your soon-to-be-ex in some amount that is to be used for things like legal fees. The purpose of this award is to get one of the spouses by until a permanent order is issued from the court. The court will generally only consider a motion for fees like this if one spouse is at a significant financial disadvantage to the other spouse and requires financial assistance.
Any award granted from this method comes a catch: You have to pay it back on the back end of the divorce. Earlier we talked about the idea of a pre-distribution of assets from the marital estate – the same concept will apply here. While it is technically possible that the court may not require you to pay the money back, you will likely see whatever amounts you are awarded be returned to your soon-to-be-ex through asset distribution.
If you have to go to court for a contested divorce, you can expect to spend somewhere between $9,000 and $22,000. Legal challenges are not cheap – the best remedies to problems rarely are. Most of that cost is going to be driven by the amount of conflict and tension in your case, as well as the scope of the marital estate (it’s just more expensive to resolve a divorce with business interests, multiple real estate properties, etc). It is going to be absolutely critical that you have a plan on how you’re going to fund your legal challenges so that you don’t end up hitting roadblocks. The stakes in family court are high, and the outcome will impact the next 20 years of your life.
If you have any questions about divorce, custody, or other domestic relationship issues, call O’Connor Family Law at 774-314-4725. Our attorneys are here to help get you through this.