I have heard it said that divorce turns marriage into a financial transaction. Any of you who have been divorced will vouch for the truth in those words. On a personal note, my parents were divorced when I was quite young and my family has seen divorce up close several times. We know that making those financial arrangements properly will help this financial transaction be a clean one, while missing a step is inviting ongoing and unnecessary hassle.
Let me be clear: I am not writing to help you strategize your divorce negotiations but to help ensure that those agreements, once made, will be carried out as trouble free as possible.
So…here are some financial tips for life after divorce:
The Big One: Cleanly Separate all Debt.
What does this mean? Simply that if you ever signed on a loan while married, your name is still on that loan after the divorce. Regardless of what the divorce decree says about who will pay the debt; the lender will come after anyone and everyone who signed for it. Therefore, if your spouse agrees to pay for any debts, you need to clear your name from those loan documents BEFORE the divorce is complete. Like I said, this is a business transaction, so here is how it works:
Did you sign for the house loan? If your spouse is going to keep the house, she needs to refinance it in her name only. Otherwise, if she starts missing payments, your credit will be dinged and the lender will come after you for payments. You will have probably signed a quit claim deed giving up your share of ownership, so now you will be expected to pay for a house that isn’t yours. Don’t think this can’t happen. It does all of the time.
Tip: simply sell the house and split the equity.
- Credit cards
Again, keep it clean. If your spouse agrees to accept any joint credit card debt, have him transfer that debt to a card that is in his name only. Close any credit card accounts that you have both signed for; they are an opportunity for your future ex to run up debt that you might end up paying.
- Student loan debt
Same deal. If your signature is on your spouse’s student loan, you could be liable if he gets behind. I have a good friend who is receiving payment requests because his ex wife has fallen behind on her student loan payments. He is not only getting his credit dinged, but he conceivably could have his wages garnisheed (student loans can garnishee without law suits.) Lesson: make sure that whoever owes the student loan debt gets it refinanced in her name only.
- Car loans
Whoever is going to keep the car should first refinance the car in her name only. The rationale is the same as other debt: you don’t want to be making payments on a car you don’t own.
Other financial tips
- Establish your own bank accounts.
Transfer all of your assets from your joint account into your personal account. If your pay check is directly deposited into a joint account, change that deposit into your account.
If you have joint custody of children, make it clear who will claim them as dependents when filing taxes. Lack of clarity can not only cause ongoing squabbles, but can also prompt an IRS audit if both parents claim the same dependents.
Change your joint policies to cover you only. If both names are on an auto policy for example, and your ex spouse has an incident that the policy does not cover, you may be liable.
Do have a 401k or a pension plan? If so, you’ll need to know the rules of a QDRO and your 401k.
I realize that, during the trauma of a divorce, the last thing you want to deal with is the hassle of making sure your financial arrangements are in order. However, taking these steps now can avert huge problems in your future.
The cleaner the break, the better prepared you are to start your new life. Don’t set yourself up for future baggage. Take care of it now.
How have you and your family been affected by divorce? What additional tips can you offer?