As nearly half of the American population already knows, divorce is a difficult, emotional process to go through. This difficulty can be compounded depending on the number of years a couple has been together, the dollar amount of their acquired assets, and whether or not they have any children.
Divorce can also have an impact on your credit, though the proceedings themselves are not the reason for this. In other words, couples shouldn’t expect their credit scores to plummet the second they file for divorce. However, there are things that occur during divorce that can have a negative impact on credit. Here are 10 ways in which a divorce could affect your credit score:
Having to refinance your home
In order to move a property into one person’s name, it may be necessary to refinance your mortgage. As with any refinance situation, this will require a hard credit inquiry, and may also potentially add a great deal of new debt for one person.
The splitting of the debt was uneven
When assets are divided, one person may get to take more of the income, property, or assets, but also more of the debt. It all just depends on how the debt is divided.
Going from two incomes to one
If possible, it’s helpful to examine finances before a divorce and determine new budgets for both parties, so as to avoid falling behind on any bills or payments. Many divorced individuals report that losing another person’s income made the single greatest impact on them financially. Setting up a new budget early on can help avoid this issue.
Not disclosing all debt during the proceedings
At some point during the divorce process, both parties are required to disclose their financial accounts. However, as former spouses sometimes learn, not everyone is truthful about these assets. Running a credit report is the best way to ensure you’re aware of every account bearing your name.
One party doesn’t pay his or her agreed-upon share
Most courts are willing to work with couples to help them discuss and agree on a payment plan for shared assets, such as a home or any jointly-owned property.
One party still has access to the other party’s accounts
In the event that divorcing spouses do not split their joint accounts, both parties will still be responsible for any additional charges. It’s best to split any joint accounts as soon as possible.
Credit limits are decreased
Many creditors regularly check up on their clients to see if there has been a salary change, and most credit card agreements state that limits can be decreased at the creditor’s discretion. If one spouse was making more money than the other, and the accounts are separated, a credit card company can choose to lower the limits for one or both spouses. This can, in turn, affect credit scores, as well as catapult credit card holders to their maximum limits very quickly.
The divorce turns ugly
While no one enjoys going through divorce, the best solution is to try and remain civil to one another, lowering the risk of spouses doing financial harm to one another out of spite.
There is confusion over the divorce decree
People can often be confused about their financial responsibility as stated in the divorce decree. If you are unsure of where you stand or what you must pay, consult your attorney, family court facilitator, or mediator.
Spouses don’t work together
Sometimes, electric bills can be overlooked or go unpaid. Keeping the divorce process as amicable as possible helps parties communicate with one another over their shared financial responsibility after the households have been completely separated. Working together ensures everyone’s credit remains in good standing.
For every two to three new marriages in 2014 there was at least one divorce, according to the latest Centers for Disease Control and Prevention data — a grim statistic that could easily kill deflate your inner romantic.
Breaking up a marriage is hard to do and it’s made all the more difficult by the financial implications.
The average price of a divorce, from start to finish, lands at around $15,500 (including $12,800 in attorney’s fees), according to a 2014 survey put out by Nolo, a publisher specializing in legal issues. If the legal expenses are one side of the coin, figuring out what to do with your joint financial assets and debts is the other.
Here’s everything you need to know, plus some tips for protecting your finances when a marriage ends.
Where you get divorced
When it comes to splitting up debts, the state you live in can sway the outcome in a big way. A majority are considered equitable distribution states, where the judge uses his or her discretion to divide up debt in a way that’s deemed fair and evenhanded.
Each state has its own set of laws and procedures, but Vikki S. Ziegler, a longtime matrimonial law attorney licensed in multiple states, says the court generally has more leeway in an equitable distribution state.
Simply put, the judge has the freedom to take multiple factors into consideration. This might include everything from one spouse’s income to another’s employment status.
The situation could play out much differently if you live in a community property state. These states are listed below, and in them, debt is viewed a bit differently.
*Alaska has an optional community property system.
Community property states typically split all marital debt right down the middle, regardless of who actually accrued the debt. This means that if your spouse racked up hidden balances during the marriage, you’ll likely be on the hook for half. In community property states, the divorce process is typically more cut and dried than subjective.
“The most important thing for someone leaving a marriage to understand is how the law applies in each state that they are getting divorced in,” Ziegler told MagnifyMoney. “How are you going to allocate debt, and who’s going to be responsible for what?”
An experienced divorce attorney can help fill in the blanks.
The type of debt
The type of debt you have is another biggie. Let’s first zero in on secured debt, like a mortgage or car loan.
According to John S. Slowiaczek, president of the American Academy of Matrimonial Lawyers, whichever spouse decides to keep certain assets — such as the house or a car — will also assume whatever debt is left over.
“Debt associated with an asset will ordinarily be allocated to the person acquiring the property,” Slowiaczek tells MagnifyMoney.
Your mortgage: The loan will likely be the responsibility of both parties equally, unless it’s only in one party’s name. If you both co-borrowed the mortgage, you’ll have to decide who will keep the loan and who will exit if one partner wants the house. One way to get one name off a mortgage loan is to refinance the debt and put the loan under just one person’s name.
If you decide to sell the house, either the couple or the court will likely compel that process, after which you can divide the proceeds equally after paying off the debt.
If you’re planning on staying in your home, refinancing your mortgage before you divorce can help ease the financial blow. With divorce being as costly as it is, finding ways to trim your budget can better prepare you for a single-income lifestyle. Refinancing could do just that, lowering your monthly payment and potentially your interest rate, assuming you have good credit.
A lower bill may also make it financially possible for you to stay in the house, if that’s what you want. Plus, if you apply before splitting, you’re more likely to get approved since a combined income will likely make you more attractive to lenders.
Your car loan: The same usually goes for car loans — if one spouse wants to keep the vehicle, he or she could refinance the loan under his/her own name. Or you can sell altogether and divvy up the cash. As Slowiaczek mentioned above, remaining debt follows the asset, so whoever keeps the car will assume the debt.
Credit debt. The way nonsecured debts, like credit cards, are handled goes back to individual state laws.
In a community property state, Ziegler says the courts usually take a 50/50 view of marital debt. But equitable distribution states typically look at who contributed to the debt, how much money each party makes, and other statutory requirements that allow them to potentially allocate the debt differently. In other words, things aren’t as black and white, and the courts have more interpretive wiggle room.
Barbara, a 36-year-old sales professional in Tampa, Fla. is eight months into the divorce process. Florida is an equitable distribution state, meaning the debt she and her husband accrued could end up being split any number of ways. One of the toughest parts of her experience has been the $35,000 of credit card debt she says she shares with her ex.
“It was mostly accrued by [my husband], but mostly in my name,” she told MagnifyMoney. The couple also have a $202,000 mortgage, and deciding who will assume the mortgage (and the equity in the home that comes with it) has been a point of contention.
Ziegler says Barbara probably has more leverage than if she lived in a community property state.
When you acquired the debt
One bit of good news: no matter where you live, Ziegler says premarital debts are off limits. Where divorce is concerned, the court is only interested in debts that were accrued during the marriage. The same generally goes for debt acquired post-separation.
How the debt was used
Every case is different, but the reason behind the debt can sometimes be argued. If, for example, debt was taken on for one spouse’s personal use, the other spouse might argue against being on the hook for it, depending on the property laws in the relevant state.
“Credit card purchases to buy groceries or make a car payment are obviously marital, but what about debt that was racked up for personal use, like [cosmetic surgery] or gifts for someone your spouse was having an affair with?” asked Ziegler. “It can be argued that those expenses are not marital debt and should be assumed by the individual.”
This underscores the importance of parsing out individual versus marital debts. To help make it easier, Ziegler recommends that couples maintain two different types of accounts: joint for marital expenses, and individual for personal spending. It’s also wise to keep your statements handy.
How to financially protect yourself during a divorce
Divorces don’t usually come cheap, but there are steps you can take to soften the blow.
Sign a prenup
Prenuptial agreements aren’t as taboo as they once were. According to a survey released by the American Academy of Matrimonial Lawyers (AAML) in 2013, “prenups” are on the rise; a whopping 63 percent of divorce attorneys cited an increase in recent years. This is because they serve as a loophole against state rules, dramatically simplifying the fight over debts and assets.
“Most prenuptial agreements say that if the debt is in either party’s name, it’s separate debt that cannot be allocated or redistributed for payment,” said Ziegler.
Take steps to safeguard your credit before you divorce. As soon as you begin the separation process, do yourself a favor and make a list of all your individual and joint debts to get an idea of what you’re dealing with. Are you or your spouse listed as authorized users on any accounts? If so, cancel those straight away to avoid accruing any new joint debt. To make sure you don’t miss anything, pull your credit report and take a thorough look at your open accounts.
Ziegler also suggests making it clear in the divorce agreement who’s responsible for which debts — but that doesn’t always protect you.
“The reality is, if your name is still attached to the account, and your ex-spouse defaults on payments, it’s going to negatively impact your credit,” she warned.
If your ex agrees to pay off any debts, you can protect yourself by transferring the balances fully into the former partner’s name.
As a newlywed, the very last thing on your mind is probably getting divorced. But, unfortunately, divorce is something you may encounter — there were over 813,000 divorces in 2014 alone, according to the latest CDC data, compared to 2.1 million new marriages.
The cost of getting divorced can be just as expensive as getting married. Some estimate the legal fees alone can cost thousands of dollars, not to mention other costs that may be involved in changing your life post-divorce.
The difference is, when you get married you likely had time to prepare your finances. This may not always be the case when you get ready to get divorced.
So, what can you do if you can’t afford to get divorced? Here are some options that may be able to help lower the high cost of divorce.
Shop around for the right attorney
Brette Hankin, a business development manager for S&T Communications in Colby, Kan., says she visited several divorce attorneys to find one that was within her price range.
“The first lawyer I talked to said the retainer fee would be $10,000,” she says. “There was no way I could afford that.”
Eventually, Hankin visited other attorneys in her community and was able to find one who was more affordable.
“The lawyer I chose had a $5,000 retainer fee and was willing to return whatever money was not used for my case,” she says.
Ask friends and family for referrals to good attorneys in your area, or see if your state’s bar association has a way to search for attorneys specializing in divorce/family law.
Work out a “limited scope” arrangement or a payment plan
To help clients who may not be able to pay for their entire legal fees up front, some attorneys may also be willing to take payment plans, or work in a limited scope. Limited scope means they only handle certain parts of your case and you can handle the others.
“In cases where a client cannot afford traditional representation, I will sometimes represent a client in what is referred to as limited scope representation,” says Darlene Wanger, Esq., an attorney based in Los Angeles. “This means that I could represent a client for a single hearing, and then I am no longer the attorney of record.”
To cut costs even more, Wanger says she sometimes acts behind the scenes as a consulting attorney, helping clients fill out paperwork and working through the process without appearing in court.
“Never appearing in court can save a very large expense,” Wanger says.
If you still feel sticker shock at the cost of your legal fees, ask your attorney if you can work out a payment plan. This can help relieve some of the pressure to pay their fees all at once.
Reduce your filing fees
If you’re the spouse filing the divorce petition, ask about the filing fee with your local courthouse. The fee for filing a divorce petition varies based on the state and county in which you live and file your divorce. Filing fees can vary from $70 in Wyoming to $435 in California.
For simple divorces, without children or a large amount of property, you can usually fill out the petition yourself. This can save you from paying attorney fees.
Many individuals who are unable to afford a divorce don’t realize that they can get the divorce petition filing fee waived as well. A judge will review a written affidavit stating your economic hardship so the filing fee can be waived.
Keep things amicable (if possible)
When people think that they can’t afford to get divorced, it’s usually because they’ve heard about long, drawn-out court battles that cost thousands. But if you work with your spouse as much as possible, you can save a lot of money on attorney fees and court costs.
For example, after the filing of a divorce petition, the responding spouse will generally file an answer, even if they agree with everything stated in the petition.
While this can speed up the divorce process, it will cost more money. Any time an answer is filed with the court, it is subject to another filing fee. You could apply for the fee to be waived again, or if you and your spouse are in agreement, the answer could be written as a formality but not filed with the court.
Filing a joint petition for divorce can also save money as neither spouse would have to be served by a sheriff or certified mail.
Get divorced for free
Lizzie Lau,a 47-year-old travel blogger, used as many resources as she could to help her save money during her divorce. She was able to get divorced for free in California, the state with the highest filing fee.
“Initially, I assumed I would have to pay several hundred dollars in filing fees even though I had no income and no support,” Lau says. “But I went to the courthouse and talked to them. I was told that based on my income the fee would be waived, and as long as we didn’t go to court, it would be free. Although, they told me it was pretty rare for a divorce to go through without going to court. I assured them that I was going to be the exception to the rule.”
Lau got the filing fee waived for her petition. Plus, she and her spouse worked together to avoid other costs. Because they were in agreement, he didn’t file a response, and they were able to get divorced without appearing in court, saving them from paying for attorneys and other court costs.
File a pro se divorce
Part of Lau’s strategy included filling out her own legal paperwork and representing herself for her divorce case. This is called a pro se divorce, meaning you represent yourself without an attorney.
This is not a strategy that would work well for divorce cases involving disputes over child custody or property and asset division.
There are a wealth of resources online that can assist people with filing pro se divorces by explaining things in common language.
Prepare for life after divorce
One of the other overlooked costs of getting divorced is the cost to set up a new household. In Hankin’s case, her ex-husband kept the family home while she moved to an apartment.
“He offered to let me stay in the family home, but I couldn’t afford the house payment,” she says. “Instead I got an income-based apartment.”
In other cases, assets may have to be sold if neither party can afford to keep them. Hankin says she got financial help from her parents and did her best to save money and live frugally.
“You don’t think about the costs of setting up a new household until you have to do it,” Hankin says. “Getting pots and pans, furniture, restocking your pantry. All of those things you never think about. We were married for 19 years before we got divorced.”
Hankin shopped at garage sales to save as much as possible. She also got a second job and cashed in her retirement savings. “I felt that it was my only option,” she says. “Now I’m starting from scratch to save for retirement again.”
In MagnifyMoney’s 2017 Divorce and Debt Survey, we polled a national sample of 500 divorced U.S. adults to understand how money played into the end of their relationship.
Here are our key findings:
AMONG ALL SURVEY RESPONDENTS
More money = more problems
Among all respondents, 21% cited money as the cause of their divorce.
In fact, the more money a respondent earned, they more likely they were to cite money as the cause of their divorce.
Among people who earned $100,000 or more, 33% cited money as the cause of their divorce.
By contrast, only 25% of people who earned $50,000 to $99,999 cited money as the cause of their divorce. And the lowest income-earners, those earning $50,000 and under, were the least likely to say money was the cause of their divorce at just 18%.
Money might cause more stress for younger couples
While rates of divorce rose along with the amount of a couple’s’ earnings, the opposite seemed to be true when it came to age. Younger couples reported that financial issues drove them to divorce, while the rate went down for older couples.
Among 25-44 year olds: 24% cited money as the cause of their divorce
Among 45-64 year olds: 20% cited money as the cause of their divorce
Among those 65 and over: 18% cited money as the cause of their divorce
AMONG SURVEY RESPONDENTS WHO CITED MONEY AS THE REASON FOR THEIR DIVORCE…
Divorce often led to debt
Between legal fees, paying for your own expenses instead of sharing the burden with a partner, and other costs that come up when you choose to end a marriage, divorce gets expensive. For couples who already faced financial problems, the added expense often meant getting into even more debt.
Well over half (59%) of respondents who cited money as the cause of their divorce also said they went into debt because of their divorce. And a whopping 60% said their credit score fell after the divorce. By comparison, just 36% of the total survey group said they went into debt because their divorce, and only 37% said their credit score suffered.
Among those who cited money as the cause of their divorce…
2% of respondents said they got away with $500 or less in debt.
13% said they racked up debts of $500 to $4,999.
14% said they took on between $10,000 and $19,999 worth of debt
23% said they owed $20,000 or more
Among all survey respondents…
2% were less than $500 in debt
8% were $500 to $4,999 in debt
6% were $5,000 to $9,999 in debt
8% were $10,000 to $19,999 in debt
12% were $20,000 or more in debt
Overspending was the biggest source of tension
Nearly one-third (30%) of those who said that money was the reason for their divorce also said overspending was the most common problem they faced. Overspending can easily add up to carrying credit balances when the cash runs out — and in fact, credit card debt was the second most common money problem these respondents cited.
Bad credit was also a problem, along with other types of debt like medical and student loan debt. Most financial issues seemed to stem from bad cash flow habits, however. Only 3% said bad investments caused trouble within their relationships.
Financial infidelity was rampant
When overspending and debt become issues within a marriage, partners may feel compelled to hide mistakes and bad money habits from each other. In fact, 56% of survey respondents who said money was the reason for their divorce also admitted that they or their spouse lied about money or hid information from the other person. By comparison, just 33% of all divorcees surveyed said they lied or were lied to about money during their marriage.
Among the survey respondents who cited money as the cause of divorce…
37% said their spouse lied to them about money
8% said they lied to their spouse about money
10% reported that they both lied to each other.
Among all survey respondents…
24% said they their spouse lied about money
3% said they lied to their spouse about money
5% said they both lied about money
Most would rather keep separate bank accounts
With financial stress causing trouble in relationships, it’s not too surprising that 57% of people who cited money as the cause of their divorce said married couples should maintain separate bank accounts. Forty-three percent maintained that within a marriage, couples should keep joint accounts — even though their marriages ended in divorce.
Most failed to keep a budget
A whopping 70% of respondents who said their marriages ended due to money said they didn’t stick to a budget during their marriage. A budget is such a simple tool, but one that’s essential to tracking cash flow and understanding where money comes from — and goes.
Most don’t believe prenups are necessary
Dealing with divorce is never easy, especially when financial problems caused the separation and continue to plague couples after the paperwork is signed thanks to new debts.
Still, 58% of survey respondents whose marriage ended in divorce due to money said they didn’t think couples should get a prenuptial agreement before tying the knot.
How to deal with your finances after divorce
Here are a few tips to help you get back on your feet, financially speaking, once your divorce is finalized:
Recognize your bad money habits. Money issues can negatively impact a relationship, and even cause it to end. But they can hurt you as an individual, too.
Create a budget. Remember, most people whose marriage ended due to financial stresses didn’t keep a budget during their relationship. Doing so now will help you stay on top of your money and know exactly where it goes. That will allow you to make better spending decisions and help prevent taking on even more debt.
Don’t make major money decisions right away. If you just finalized your divorce, you may feel like you need to make major changes or choices right away. But take a moment to slow down and give yourself time to heal. You shouldn’t make emotional decisions with your money — and going through a divorce is an emotional time. Wait until you can think more clearly and rationally before doing anything with your assets, cash, or career.
Money should not be your therapy. Because divorce can do a number on you, mentally and emotionally, you may need help with the healing process. But that does not mean retail therapy! It’s tempting to spend on material things in an effort to make yourself feel better, but any happiness you feel from shopping sprees is temporary and fleeting. It can also leave you into even more debt. Put away your credit cards, stick to cash, and use your budget to guide you.
Work to rebuild your credit. 60% of people reported their divorce hurt their credit. If your credit suffered too, take steps to rebuild it. Pay down debts, make all payments on time and in full, and don’t continue to carry balances on credit cards. Try to avoid taking out too many new loans or lines of credit all at once.
You should also work through this checklist of important actions to take after your divorce:
Update your beneficiary information on your accounts and insurance policies.
Update your will and estate plan.
Make sure all of your assets are in your name only and no longer jointly held.
Cancel accounts or services you held jointly, like utilities or cable. Open new accounts for you in your name.
Allocate a line item for savings in your budget. You want to start rebuilding your own cash reserves. Set an automatic monthly transfer from your checking to your savings so you don’t forget.
Close joint credit cards and get a new line of credit in your name.
If you have children, keep careful records of expenses for them that you plan to split with your ex, in case of disagreements. Ideally, make sure your divorce agreement includes an explanation of how child care will be split and who is responsible for what, financially.
Think about whether you need to hire new financial professionals to help you. You may want to find a new financial planner and certified public accountant. You’ll want to update your financial plan to reflect the fact that you’re no longer married.
Survey methodology: 500 U.S. adults who reported they were in a marriage that ended in divorce via Google Surveys from Feb. 2 to 4, 2017.
In the midst of your divorce, you’ve probably discussed separating your assets, but you might be less inclined to talk about who’s going to take responsibility for shared debts.
Most courts will divide up responsibilities for these during a divorce decree, giving one individual the ownership of each debt.
However, “the decree does not change the contractual relationship that you or your spouse may have with the creditor because the creditor is not a party to your divorce,” John C. Heath, credit expert and attorney for Lexington Law, a Credit.com partner, said.
That means that while only one of you may now be legally responsible for paying the debt, the other person’s name is still attached to it unless you let the creditor know to remove it. This could be why you’re still seeing your former spouse on your credit report.
How Shared Accounts Get Separated
Rules on how to divide joint accounts vary by state, but most places consider debts acquired during the marriage as shared property. It may be a sore subject, but it’s important to make dividing up your debts a priority.
Contact your financial institutions and close or separate all shared accounts, including credit cards, home loans and mortgages.
If you don’t, you and your former spouse will continue to be tied together financially. And if an ex-spouse runs up credit card balances and fails to pay or falls behind on a mortgage that still has your name on it, the negative marks will show up on both of your credit reports.
After closing out all joint credit cards, you can ask each financial institution to re-issue you a card in your name only. You can also refinance joint installment loans such as auto and home loans.
“Be diligent in refinancing debt or selling an asset that has debt against it, and in making certain that any assets get retitled,” Rebecca Zung, Esq. Marital and Family Law attorney in Naples, Florida, said.
It could be better to make these decisions between the two of you instead of letting a third party determine your financial future.
“You can agree to divide debts and account responsibilities and then take appropriate steps to remove the non-obligated spouse from divided joint accounts,” Heath said. “You are a better decision maker than a judge who may glance at your case prior to making a decision about your financial future.”
If you have shared credit card debts, you can use a free tool like Credit.com’s Payoff Calculator to figure out a plan to pay off your debts.
One of the most common things that impacts credit scores after a divorce is when the person responsible for settling a joint debt doesn’t pay up, Heath said.
“If this failure to pay is on a joint account, it will affect both parties, including the innocent party’s credit reports,” Heath said in an email. “Even though the innocent party is not responsible for the debt, it is still reported as delinquent on their credit report.”
If your ex isn’t paying the debt, and it’s messing up your credit, you can dispute the delinquency with the credit bureaus, Heath said. (You can go here to learn more how.)
Also, “you can ask the court to compel or find your ex in contempt for failure to pay,” he said. “You could also ask for your attorney fees and costs to do this.”
Monitoring Your Credit
As you update your accounts, it’s a good idea to make sure the changes take.
“Check your credit a few months after the divorce to be sure it is accurate,” Rebecca Zung said.
Too see where your credit currently stands, you can view your free credit report summary on Credit.com. This report is updated each month, so you can see how changes are affecting you as time goes on after your separation and if there are any other steps toward improvement that you need to make. You can generally improve your credit in the long-term by making all loan payments on time, keeping debt levels low and limiting new credit inquiries as your score rebounds.
[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]
If you’ve gone through it, you don’t need me to tell you how financially devastating divorce can be. Many people lose half (or more) of everything they’ve saved over their lives. This includes their home, retirement, business and investments. If that isn’t bad enough, divorced people often see their income wither while their expenses explode. No doubt about it, divorce is bad news financially.
Having said that, all is not lost. In fact, there are plenty of things you can do to improve your situation significantly. Specifically, if you’ve gone through divorce recently, here are eight things you can do now to help yourself get back on track as quickly as possible.
1. Do Not Panic Or Waste Energy
This is much easier said than done I realize, but you need every ounce of energy you can muster to rebuild your financial life. Don’t waste time worrying – it won’t help. Also, please know that you are not powerless. There are plenty of steps you can take that will help turn things around quickly (which I’ll share in a minute). Don’t worry. You have many choices, and as bad as it may seem, you probably aren’t going to be out in the street. Don’t waste energy worrying because it serves no purpose and saps you of the energy you need to get things back on track. (A divorce survival guide may be helpful too.)
2. Inventory Your Financial Life
You may or may not understand how finances and investments work right now, but that doesn’t matter. In time, you will improve your knowledge.
At this moment, it’s time to account for where you are and that means putting together an inventory of your financial life; income, expenses, assets and liabilities. I suggest you create a little spreadsheet or loose leaf binder. Make a separate sheet for income, another for expenses, another for assets and the last sheet for liabilities.
On each sheet, make a line item entry with the type of account, amount, who owns the account, what the rate is and the contact information at each institution.
It’s astonishing how empowering it is just to have one place to go to in order to get an overview of your finances. Knowledge is power, friend — take advantage of it.
You can also get your credit reports for free once a year — but you can’t check your spouse’s without their knowledge — so it’s not a bad idea to try to persuade your spouse to go over both your credit reports before you split up if that’s possible.
[Editor’s note: You can also get a free credit report summary on Credit.com, which includes two free credit scores updated monthly, at Credit.com. Check both carefully. Your credit report should include all your open accounts, including joint accounts you may have forgotten about (and ideally, should close). And a drop in your scores could be a sign that your spouse is running up balances on joint accounts, or failing to pay joint accounts he or she promised to pay.]
3. Balance Your Budget
I mentioned above how important it is to inventory your income and expenses. This is a priority. After a split, it may take you time to re-adjust to your new income/expense story. The problem is, you could dig yourself into a debt pit during the adjustment period. Please don’t let this happen.
If you don’t know what you spend on average right now, start keeping track. This is the most important piece of financial information you can have. With it, you’ll know if you need to cut back or get back into the workforce (if the expenses are higher than the income) or if your situation is stable.
If you figure out that your spending exceeds your income, it may not be pretty. But you are a lot better off knowing what the situation is than by ignoring it.
4. Make Sure Your Accounts Are Set Up Correctly
I get questions all the time from people who are recently divorced asking about how their accounts should be titled. Since I’m not a lawyer, I can’t provide that kind of advice. Also, the right direction for you might be different from the right advice for the person next door.
If you are divorced, your legal representative is responsible to advise you on how to take title to your accounts and also, who the beneficiaries should be on your accounts.
This topic is especially important when it comes to dealing with retirement accounts. Acquaint yourself with the rules on this, but don’t try to be your own attorney. Get good, sound legal advice when it comes to proper vesting and naming your beneficiaries.
5. Identify Priorities
Divorce often comes as a shock. If that describes your situation, you might feel as though everything is coming at you all at once. That’s understandable but dangerous. When people have too much on their plate they can easily become overwhelmed and then freeze up.
If you determine that you don’t have enough income to balance your monthly budget that has to be your first priority. If you (and your children, if you have them) depend on your ex-spouse for continued support, make sure they are required to buy life insurance and name you and the children as beneficiaries.
If you are stuck and don’t know how to overcome this problem, it might be helpful to talk to a trusted friend who isn’t as emotionally impacted by the split as you are. They might be able to see solutions more easily than you can right now.
If budgeting isn’t the biggest problem, great. What do you want to focus on? Improving your finances? Finding new work? Moving? Make yourself a list of everything you want to do and discuss it with your objective friend in order to come up with an action plan and time frame.
6. Pick Your Team
In putting yourself back together financially, you can do a lot of the heavy lifting yourself, but you don’t have to. If your situation requires it, don’t be shy about getting expert tax, legal and financial advice.
Of course, you want to get referrals from trusted sources but don’t stop there. Make sure your team empowers you and makes you feel comfortable. It’s their job to make sure you understand what they propose doing and why. If you feel intimidated or confused, move on. It’s your money. You have the right to expect a professional and supportive team.
By taking inventory, balancing your budget, creating a priority list and assembling a strong team, you’ll learn a great deal about finance. But keep the wagon rolling. Devote 20 to 30 minutes a day to expand your education. Talk to experts. Ask questions. Attend webinars. Never stop.
I’ve been in this business for 30 years and I learn something new every day. Finance is fascinating and powerful. You can never learn too much.
By taking the steps I’ve mentioned, you’ll be well on your way to a more solid financial footing than when you first divorced. But if you want extra points, boldly go where few others go and create a financial plan for yourself with your new circumstances.
A financial plan tells you where you will likely end up if you continue on your current path and what you might consider doing differently in order to have a different outcome. This may seem like a daunting task but it’s actually not. If you don’t have an adviser you can run your own projections. If you have a financial adviser, you should already have a solid plan you can refer to.
Of course, if you already have a financial plan, you should update it to reflect the changes in your financial situation.
These eight steps won’t change your life overnight, but by taking it one day at a time, things will improve dramatically. And there is nothing here you can’t do. Take a breather. Enlist help from people you trust and who care about you. You don’t have to rush. You’ll see that rebuilding your life after divorce isn’t as hellish as it seems.
“Sign here. I love you, but you can’t have my money.”
Are those not the most romantic words you’ve ever heard? Prenuptial agreements are one way to ensure that your money stays separate while you are married, but can definitely be a killjoy when it comes to the relationship.
So what if you really want to keep your money separate but have decided that the prenuptial is not worth the headache, expense or aggravation? Are there ways to keep your money separate while you are married? The short answer is yes … most of the time. Certain assets can absolutely be protected. Others … not so much.
Drawing (State) Lines
The first level of the analysis is to find out if you live in one of the nine community property states. They are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, all property is presumed to be “community” property (of the property of both parties) and the burden is then on the one who wants to prove otherwise to the court. That this can often be a difficult task goes without saying. The principle behind this and all marital property law (as well as alimony law) goes back more than 100 years, and is that both spouses have a duty to support each other in all ways; morally, physically, financially.
The vast majority of the states are equitable distribution states. In those states, the courts will take a look at everything either of the parties has and make three piles: his, hers and theirs (with gay marriage now legal, the piles may be his, his and theirs or hers, hers and theirs, but you get the idea). So the his and her piles would contain assets, such as inheritances, gifts that were meant for just that one spouse and any assets that the party earned prior to the marriage that were all kept separate during it.
The caveat to the above though — and this is a big one — is that, generally, anything that either party actually “earns” during the marriage (including wages, business income for a business where one person works, 401K contributions, stock options — anything received for actual work), is going to be marital. Unless you have a prenuptial or postnuptial agreement, there is no keeping this element of your assets separate.
Furthermore, think of those “earnings” like a teaspoon of baking soda you add to your cake mix and stir up – once it’s in there, that’s it. You can’t decide to take the baking soda back out.
With those concepts in mind, here are a few ways to keep your assets separate.
1. Keep Your Inherited or Premarital Assets Separate
The word “commingling” is often synonymous with “lottery winnings” to one spouse; and “gambling losses” to the other. If you have an account that has funds in it that you either owned prior to the marriage or received during the marriage as inheritance or a non-marital gift that you mixed in to your earnings or joint funds from another bank account – then poof! The entire account becomes marital. Why? Because the courts consider money to be “fungible” meaning that once that marital dollar goes in, you can’t tell which dollar is coming back out. (Remember the baking soda.) To prevent problems and/or confusion in case of divorce, you can keep your premarital/inherited assets separate during marriage.
2. Don’t Put Your Spouse’s Name on the Title of Your Real Estate or Bank Accounts
Many people own a home prior to getting married. Oftentimes, especially if that home is where the married couple lives, the homeowner decides to throw the other person’s name onto the deed or the title of your financial accounts. While you could argue down the road, that you only did if for estate planning purposes, meaning that the spouse would be able to get the house and the money if you died first, that argument almost always fails in court.
To be certain, you don’t have to have this argument, just don’t put the other person’s name on the deed or your bank accounts – unless you are completely prepared to hand half of their value over to the other spouse in a divorce.
3. Be Careful About What You Use Your Earnings For
It is easy enough to decide to keep your own property in your own name and not add someone’s name to a deed or to a financial account. The rub comes when it maintaining that premarital property. This is where one or both of the spouses use their paychecks or other joint funds to pay down the debt on that property, or to make renovations or improvements to that property.
Now the court is going to be faced with trying to carve out which part of the value of the property might be marital and what part of the value has remained non-marital – a tedious and tortuous task. To keep it all clean, just use your funds from your premarital or inherited account to maintain your non-marital property, too.
By following these few simple steps, you should be able to keep the property you owned prior to the marriage, or inherited during the marriage as your own separate asset, without having to spend lots of money to litigate what was yours in the first place. You and your spouse can enjoy the fruits of your joint labor, and what the two of you built during the marriage.
One question new clients almost always ask is “how long will my divorce take?” And the answer is almost always the same; “It depends!” Your attorney can only control his or her portion of the process, which can cause frustrating (and expensive) delays. Here are some of the most common things that can make a divorce drag on.
1. The Judicial System
The judicial system, like most governmental entities, is overtaxed, overburdened, understaffed and underfunded. Each judge typically has way more cases assigned than is possible to efficiently handle. In the family law area, there are roughly 250 new cases per month and three family law judges (who don’t just have family law on their dockets). This means to get a hearing on a simple Motion to Compel Financial Disclosure can take several weeks and, quite often, several months.
This means if you need financial information just to do a business valuation and your spouse isn’t providing it, it takes a long time to get before the judge to obtain said documents. Moreover, the judges don’t necessarily rule from the bench, but instead take the issue “under advisement” meaning more wait time for a ruling, which can often take months.
Meanwhile, clients are frustrated because their case isn’t going anywhere, their lives are on hold and they continue to fight with their soon-to-be ex. Tensions remain high and often even get worse during this time.
2. Financial Documents
In most jurisdictions, a certain amount of financial disclosure is required in any divorce. This usually includes income information, tax returns, bank statements and credit card statements. Further delaying the proceedings, sometimes there are account transfers for which you or your spouse may have no record. Therefore, more discovery regarding requests for production or interrogatories will be required.
3. Financial Experts
Many times, one or both sides have engaged a financial expert to do a business valuation or determine a self-employed person’s true income. They can also conduct a lifestyle analysis for alimony purposes or determine if a party is hiding money. This expert will often require financial statements, general ledgers, tax returns, credit card statements and possibly more.
In the event the proceedings involve custody, the financial expert may interview the parents or other family members. If these experts have a lot of cases or are having difficulty getting the documentation to conduct an accurate analysis for mediation or trial, this could also slow down the proceedings.
4. Uncooperative Parties or Opposing Counsel
If the lawyer or the financial expert determines certain information is necessary, they will send opposing counsel a request for said information. If the other side doesn’t share the information for one reason or another, the inquiring lawyer will have to file a motion with the court. This motion with the intent for sharing establishes a hearing in front of the judge, which could potentially tack on months to the trial.
Divorce is traumatic enough. Long delays can add to the already-elevated stress of the situation. Understanding there are certain components to the procedure over which you nor your attorney simply don’t have control may help alleviate some anxiety. Take deep breaths, mediate and have faith that what’s best will prevail in the end.
When a client first appears in my office for an initial consultation regarding their divorce, one of the first questions they want an answer to is “what am I (or what is my spouse) entitled to?” After getting information about the marriage history, the parties’ assets, income and their children, I give them what I call a short crash course in family law. This course starts with property division.
In family law, generally, assets that have been accumulated as a result of work efforts of either party during the marriage are considered to be marital. These assets include any contributions to retirement plans, either by the employer or the employee. Sometimes, these contributions are accumulated on top of retirement assets that were already in place on the date of marriage, which can add further complications to dividing that particular asset at the time of divorce. Here is a primer on how retirement plans generally get divided once a marriage is over.
‘Gray Divorce’ Is on the Rise
Dividing assets for divorcing couples can sometimes be a challenge no matter how old the parties are, but typically as parties get older, they also have more stuff to divide. While divorce can happen at any age, “gray divorce” — an industry term for senior citizen divorce — is on the rise. According to a recent survey of the American Academy of Matrimonial Lawyers (AAML), 61% of the nation’s top divorce attorneys say that they have seen an increase in the number of divorce cases among couples over 50. In fact, in 2014, it was reported that the percentage of seniors getting divorced has doubled since 1990.
Without a prenuptial agreement, typically assets added to any retirement plan during the marriage will be considered marital. This means that if there were assets in a 401(k) at the time of the marriage, the balance as of the date of marriage can be carved off. This process involves making sure you can actually prove how much was in there on the date of marriage. (Some parties then even go as far as to try to calculate what the increase in value would be on just those assets — a task that can often be fraught with error, but can happen.) That portion gets carved off and the balance, now considered the “marital” portion, will be distributed between the parties.
A general rule of thumb is that the remaining balance would be split equally, but sometimes, in order to ensure equity and justice, a court may decide that the marital portion would be split unequally.
Divvying Up the Funds
Once it is determined, either by a court or by agreement of the parties, what portion of the retirement assets are marital, and what percentage is going to whom, then the actual division has to take place. This is where some tax implications must be considered.
Retirement assets (excluding deferred compensation and some others) are usually dollars that have not yet been taxed. The thinking is that the individual gets to save money on income taxes when he or she is in a higher tax bracket, and then gets taxed when the funds come out during retirement, when that person in now in a lower tax bracket.
So, in order to divide the funds and roll them out to one spouse from another spouse’s plan, and not have either spouse incur a tax liability (and potential penalty), Congress amended the Employee Retirement Income Security Act of 1974 (ERISA) in 1984 and passed the Retirement Equity Act (REACT). REACT created an exception to ERISA, and, thus, the qualified domestic relations order (QDRO) was born. A QDRO permits divorcing spouses to receive all or a portion of a retirement plan participant’s benefits for purposes of support and/or property division, without having a tax consequence.
When Are QDROs Required?
QDROs are required for pensions, 401(k)s, 403(b)s and other company retirement plans (government plans have their own rules for division). They are generally not required for Individual Retirement Accounts (IRAs). Rollover IRAs that were created by individuals who have separated from companies and took their 401(k) from their former employer and rolled the funds into a Rollover IRA also generally do not require QDROs for dividing the accounts.
The QDRO Process
In general, QDROs should be prepared by an attorney or another professional who specializes in drafting them. They are much more complicated than they appear. Many companies do offer model language, which can be a useful guide, and they also offer a review service free of charge to ensure that the language of the QDRO meets their guidelines.
Once it has been reviewed and approved, the order is then submitted to the court to be signed as an order, and then incorporated into the Final Judgment of Dissolution of Marriage. The signed order then gets sent to the company so that the division can be effectuated.
Dividing retirement assets can be a bit of a messy business, but can be done. You may want to consider consulting an attorney or tax professional to ensure that the division is completed properly.