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:
- House
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.
- Taxes
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.
- Insurance
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.
- Retirement
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?
photo credit: Icrontic.com
I’d never want to go through this, but it’s excellent advice. I think having it all cleared up and separated with care, will be better. If the 2 are not together anymore, then their finances shouldn’t be either. It will bring only chaos and problems.
Romona,
Exactly, but it is amazing how many people (even with an attorney’s advice) don’t take the steps in this post. They are asking for future regrets.
Well, I think they consider these issues as “menial”. They still feel like a “family” and would hope they can remain friends. And some do. But when it comes to MONEY, there’s nothing like “being friends”. Once you’re setting yourself a new life from the ex-spouse, I’d believe it’s a good idea to go separately with everything. This way there won’t be regrets or problems. You’ve got your own stuff, he/she’s got his/her own and it’s all CLEAR and CLEAN.
Ramona,
Many times (most times?), the underlying issue behind divorce is broken trust. Some divorced couples, especially when there is joint custody of children, need to maintain amicable relationships. However, being amicable does not equate to unmerited trust…especially where money is concerned. Keeping future finances CLEAR and CLEAN (your words) is the only prudent thing to do.
Joe, this is great advice. However, I have seen many people divorce, and many seem to lose all common sense. They end up going through mediation and spending thousands of dollars because they each want the other to pay! The strategies you suggest are what rational people should do.
If only people could read this and listen, they would save themselves a ton in attorney fees. (I am not saying all divorced people are irrational. I have just seen a flurry of bad divorces recently, and they would have been so much better off financially had they just had a cool head and split things down the middle, since that is what happened in the end anyway.)
“Tip: simply sell the house and split the equity.”
Would love to, but we’re under water.
@Everyday,
I realize it is hard to be rational in the midst of divorce, but if people would only think of what their future will be like if they don’t make a clean split, maybe they could become a bit more rational. As I said, we have seen divorce up close in recent years and fortunately, even when there was bad blood, the couples were able to make good financial arrangements (other than not separating the student loan – which I mentioned in the post).
@Heather,
Obviously, that is a contingency I didn’t consider. It still could work if there are enough joint assets available to fund that underwater shortfall.
Joe, I have been through this myself. It took a year to finalize everything. And two years later to finalize it right. It’s easier when there is no children and ten times harder when there are. It’s gut wrenching to say the least. Financially, 12 years later, just getting back on my feet. My ex still hasn’t recovered financially and probably never will. Still good article. Thanks..
50plus,
Divorce is indeed gut wrenching. As I mentioned, I personally haven’t been through it, but have been very close to it. Allow me to ask: as one who has obviously experienced this ordeal, what advice (financial or otherwise) would you offer those who are in it right now?
Joe, My advice is be ready an emotional rollercoaster. Take one day at a time and have a lot of patience with the process. Remember your kids, their world will never be the same with their parents apart. Birthdays, graduation, life events will be harder. The adults can rebuild, the kids can never have an intact parents again. That wound never heals.
Financially, you lose everything and have to start from scratch. You may recover if you were the bread winner. But probably not if you weren’t. Child support and alimony are sacrifices you make and they damage your finances for many years
Bitterness is something you integrate into your life because you can’t overcome the devastation. My advice is hold on, because you will eventually heal, I can guarantee it.
@50splus,
Thank you so much for sharing this stark snapshot of the devastation of divorce. I am sure those who are currently in the midst of it can identify with the emotional rollercoaster. Hopefully they will also hang on to your words of hope: “you will eventually heal, I can guarantee it.”
Well right now i am happily married and i would say i may not get divorced but if anythings happens between us then your article would help me to take the right decision and what to do.Keep Continue
Stuart
Well, these are things any competent divorce lawyer will recommend and do for you–kind of obvious. I was divorced 4 yrs ago–we have 2 kids.
What would be more helpful is advice about how to proceed in the 10+ years AFTER the divorce–when most people are forced to make do without professional advice from lawyers etc.
All kinds of financial planning and other decisions — most of the advice out there is ONLY for couples, who are also the parents of all the kids in the household. Everthing from how much you’ll need in retirement to how much life insurance you need. It’s a weird bias because so many people are divorced and single these days (or divorced and remarried with blended families)–what about some advice for us?
Everything is different when you’re single and there’s another parent who can help with college costs and who could take over custodial care of the kids if you die. It’s also different if some of your kids have different fathers. Taxes, Financial aid forms for college–it’s all so complicated now.
Another big issue for me- -since I work and support myself fine, and I own my own home, is remarriage financially sensible when my kids are still young? Who needs that marriage tax penalty that might come back next year? And why should I risk losing my home in another divorce? And why would I want to get into a position where I would look like I have more income on the college financial aid forms? I’m really thinking of just moving in together with my boyfriend, even though he wants to get married. It’s just too complicated.
Karen, I can relate to your situation. Mine was almost 15 years ago. It took 10 years to recover financially. I remarried after 3 years. With a combined family of 5 children it was very hard. Now all in college it’s quiet around the house.
Too complicated is an understatement. I went thru all the same things plus with an ex-spouse interfering. Its hard to get advice and help out there unless your talking to people who have gone thru the same thing.
I remarried 12 years ago and have kept the house in my name. All our finances are separate. My advice don’t marry if you don’t trust your boyfriend with your money , house or kids.
The FASFA for college is a mess. But keeping our finances separate helps. Together we make to much money to get any help.
Your a Mom first and all that goes with that. Sadly, your first responsibility is them. They are the innocents in the whole mess. At least you sound like you are financially stable. Thats a big comfort. Sorry I couldn’t help more but my heart goes out to you. I know what your going through.
@Karen,
You are right that any competent lawyer should give their clients the advise in this post. Unfortunately, many lawyers don’t…thus the need for people to read this.
But your bigger point is well taken. Once through the divorce, people need ongoing advice – and there seems to be a lack of that. I am glad that Dave (next comment) was able to share some of his heart and life experiences.
@Dave,
Thanks for sharing with Karen. I appreciate your candor and wisdom.