There are well over one million divorces in the United States each year, so you are far from alone in going through the dissolution of your married life. But the good news is you can learn from mistakes made by other spouses who let a highly emotional time lead to lasting financial consequences. When you add a lack of legal knowledge to the emotional roller coaster of divorce, the situation becomes ripe for financial missteps and legal imbroglios. A common example is couples focusing on who gets assets and how future income will be divided, while overlooking debts and loans. That is an oversight that is not malicious on either spouse’s side, or poor judgment — it’s just the result of a blind spot in expertise. You’ve been living your life as half of a married couple, so you understand the financial workings of married life; why would you know about the financial pitfalls and legal consequences of divorce when it was not a part of your life until now?
Well, it’s time to learn. While it is difficult to protect your heart, there are practical ways to help keep your wallet intact and protect your finances during a divorce.
1. Divorce Mediation. By the time a couple’s divorce proceedings are complete they will have racked up an average of $20,000 to $30,000 in legal fees. Seems astronomical? That’s because paying lawyers is, by far, the biggest chunk of expenses in a divorce. One way to cut your spending in half right out of the gate is to use mediation. Once the lawyers come into the settlement they can drag out the process considerably — which can unleash emotional and financial havoc.
Bitterness or refusal to compromise often leads to involving lawyers, because each spouse wants to put the screws to the other; but remember that continued litigation isn’t easy on you or your pocketbook — and you are hurting yourself and the kids (if there are any), not the other person. Couples usually discover too late, after they are stuck with incredulous legal debt, that prolonged court battles over objects they refused to let go of far outweigh the value of the items they were fighting over in the first place.
For most people, some form of mediation would be the best option. That way it is not a case of one spouse having to be the bigger person or acrimonious feuding between both — but rather a process of agreement reached under the supervision of an impartial third party. For example, with investments it is advantageous to sign them over rather than liquidating them and giving up the cash. If you are forced to sell shared investments by court order, you will lose money in fees and taxes. Instead, it is better if you and your spouse agree, through mediation, to sign over portions of the portfolio and avoid the fees and any tax burdens that come with selling.
2. Downsize your Lifestyle. Going from a shared household to living solo you no longer have the advantage of a single residence with mutual costs. Every expense and utility becomes your responsibility alone. The smartest move is to downsize your lifestyle. For some, this simply means a smaller apartment or more modest vacations—but for many, it can involve a drastic change.
This shift in living conditions can be adjusted to more smoothly if you have a basic plan to work yourself back up to a comfortable level. You can no longer depend on anyone else to help organize and contribute to your finances, so you will have to plan your budget, savings and investments by yourself. The help of a financial planner can be valuable in drafting a strategy to gradually take you from post-divorce slump into single prosperity.
3. Take control of your credit. First and foremost: close joint accounts, credit cards and other lines of credit as soon as possible. If you lag you can get stuck paying for debts racked up after the decision but before the divorce is final. Some spouses are stunned to learn after the divorce that their ex put all her legal services on a shared credit card or loan.
Establish accounts and credit cards in your name to start building your own credit. Applying for credit while your household income is higher can be a lifesaver since you may have a harder time qualifying after your divorce. And don’t lapse in paying debt remaining from your marriage. Paying down outstanding balances on credit cards and loans will have your credit back in good shape much sooner. Since your soon-to-be ex knows personally identifying information (like your Social Security number and birth date), it’s a good idea to monitor your credit to ensure no accounts are opened in your name.
4. Document, Document and Document. It’s so important it bears repeating. Make a copy of all tax returns, loan applications, wills, trusts, financial statements, banking information, brokerage statements, loan documents, credit card statements, deeds to real property, car registrations, insurance inventories, and insurance policies. Be sure to copy records that can trace and verify your separate property, such as an inheritance or family gifts. These will be instrumental in divvying the property and assets. Your most important weapon in defending your pre-marital possessions and ensuring your fair share of shared assets is an accurate tally of all your financial holdings.
5. Consider Selling the House. When it comes to the marital residence, you are almost always better off (emotionally and financially) selling it and splitting the cash. Changes in the tax laws have made this option even more desirable. Couples can exclude up to $500,000 of capital gains from the IRS when they sell a primary residence, even after they have divorced.
Your house may have sentimental value, but you have to take into account the ability of a newly single spouse with less income to continue paying the mortgage, upkeep and property taxes. If you decide to keep your home, be prepared you may be in for a few surprises. A year or two after the divorce you might answer a call from a sentimental spouse who refused to give up the house only to later wake up to the realization that she lacks the capital to maintain it and needs help. Or worse, is in foreclosure and soon to be out of a home and on the street, possibly with your children in tow.
There’s no way around the temporary upheaval of your life brought on by divorce; but you can minimize the enduring consequences by playing it smart instead of succumbing to raw emotion and by learning the ins and outs of your legal obligations and options. We are here to help by arming you with the best information out there. Your mission, should you choose to accept it: Convert that knowledge into power.
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