Divorce brings dramatic life changes for an estimated 1.3 million couples a year in America. One of the most challenging life changes includes the financial implications and repercussions of divorce.
Separating incomes, assets, and obligations has lifelong impacts and can be complex. To minimize the economic effects, you need to engage in well-informed planning, take control of your own situation, and work proactively with professional legal and financial advisors.
Legal and financial advisors as well as divorce support groups can provide the much needed and welcomed guidance on how to weather the financial aftermath of divorce. In addition, open communication and cooperation with your ex-spouse, when possible, will benefit both of you. In planning for the future, it’s imperative that both parties be aware of all dealings, including account numbers, phone numbers, etc.
Here are some considerations to help focus your planning efforts:
1. New budget for your life.
Prior to a separation or divorce, a family is typically viewed as one household with sources of income and living expenses, which helps to create an overall financial budget. The impact of divorce essentially turns one household budget into two, each with its own income sources and expenses.
The first step is to develop the clearest possible picture of your own budget. This may mean implementing significant life changes such as a change in job, lifestyle, or location in order to develop a balanced budget.
2. Effects of divorce on children.
Your budget realities will be affected by the details of your divorce settlement, so doing your homework and working with your attorney is critical in order to achieve a settlement that enables you to support yourself and your children or dependents, if you have them.
You also need to be aware of risks to your plan. Your budget can evolve due to changes in your situation or that of your ex-spouse. Adding to your own ups and downs, an ex-spouse may fail to pay alimony or child support, or seek court-ordered changes based on health or job issues.
3. Assets for your future.
Division of property is typically part of a divorce settlement. This split includes physical property such as a house, cars, or household items, as well as financial assets like bank accounts, stock brokerage accounts, ownership in a business or income-producing property, and retirement accounts such as IRAs or 401(k)s.
Working with your lawyer and other financial investment advisors will help you to account for all assets, for full disclosure and a fair division of property.
Tracking down financial assets and getting registration on the accounts changed to reflect the proper division of assets can be a major administrative task — but it’s vital for your finances to run smoothly. You will want to talk personally to all financial advisors or service providers, and you may want to move accounts to a separate provider if the previous relationships were set up by your ex-spouse.
With retirement assets, beware of the temptation to cash in 401(k)s, IRAs, or similar accounts as a short-term fix for tight finances. Besides harming your retirement nest egg, this can trigger taxes and penalties. Again, it’s best to consult your financial advisor before making any financial changes.
4. Debt and credit.
Equally important are debt obligations, contracts, or leases incurred by you or your ex-spouse — obligations that can have an impact on your own finances in the future.
The divorce settlement will address debt obligations as well as assets. Work closely with your lawyer to make a full accounting of debt that could have an impact on you, including joint accounts as well as obligations in your ex-spouse’s name. Be cautious about the possibility that any debt your ex-spouse accrued could come back to haunt you in the form of creditors seeking to collect.
Examples of debt to track down and consider include:
- Home mortgages or leases.
- Automobile loans or leases.
- Credit card debt.
- Installment loans on appliances or home improvements.
- Loans co-signed for children or others.
- Business or farm loans.
You need to be aware of your credit rating following a divorce, which may be hurt if debt incurred while you were married is not paid — regardless of which spouse agrees to assume responsibility for them.
One repercussion of financial distress, before or after divorce, is bankruptcy for one or both partners. The relationship between bankruptcy and divorce proceedings is complex, so if financial problems are an issue, be sure to discuss this frankly with a your lawyer.
5. Saving for long-term needs.
Getting a divorce is like being caught up in a whirlwind full of legal proceedings, changing personal circumstances, division of possessions, sale of property, moving, etc. When possible, remember to consider long-term financial changes and plan for your new future.
As you and your ex-spouse start separate households, any past savings plans need to be revisited based on your own new income and expenses. Long-term needs like education, health care, and retirement generally require contributions to savings over many years. Your saving needs will vary based on your stage of life, assets already in 401(k)s, IRAs, or other accounts, and so on.
An investment advisor can help examine your new financial situation and bring an objective third-party perspective on how this may impact your future investment needs. This will better equip you to make decisions that put you on the road to accumulating savings for your long-term needs.
What to do next.
- Talk with your divorce lawyer and an investment advisor.
- Collect financial details from your soon-to-be ex-spouse.
- Make a new budget reflecting your post-divorce realities.
- Consider assets, obligations and long-term needs like retirement.