Let’s be honest. Divorce is painful, even when it’s amicable. It hurts you emotionally and there is no way to escape from this fact. How badly divorce can hurt you financially depends in part on how you deal with separating your finances from those of your ex pre and post-divorce.
There is normally one person that deals with the family or couple’s finances during the marriage. Warning: If it is not you, then you need to get familiar with them now and fast so that you are able to play a role in determining how they will be separated. To get started, it is important to understand what assets and/or liabilities must be divided and renamed. The goal is to eliminate any financial ties to your soon-to-be ex. The below are a few of the “majors” and suggestions as to how to separate them.
Property – Property includes automobiles, homes, and furniture, in addition to possessions. The general rule in divorce is that each person is entitled to an equitable or fair distribution of the property. Equitable distribution weighs each person’s contributions to the marriage, including non-financial considerations, to determine a fair division of the property. If property is held in joint name and you and your spouse, likely with help from your respective attorney’s, cannot determine who gets what or how much, you will probably have to go to court where a judge will decide what “equitable means.” Make sure that the final resolution is that your name comes off or his name stays on, unless the property is sold.
In terms of a house, if both you and your spouse own the home and are on the mortgage, decide who will retain the asset and remove the appropriate person as a co-borrower on the loan and on the deed to the home. Many couples are naïve in believing that if they draft an “air-tight” separation agreement in which one party agrees to take responsibility for the mortgage loan (rather than having one party refinance and assume the loan outright) that the other party is no longer liable for this debt. However, for many lenders, the mortgage loan document trumps divorce documents. Therefore, if your spouse, the one who has agreed to keep the home, becomes delinquent on mortgage payments, the separation agreement really doesn’t matter. The lender will come after you too and your credit score will suffer. Remove your name from the mortgage and deed even if it is a long and arduous process; in the long run it will save you a great deal of hassle and aggravation as well as preserve your credit.
This goes for automobiles as well. Decide who will take ownership of the cars and re-title accordingly. Otherwise, if your ex-spouse has an accident in your former joint car after the divorce and the spouse is sued, you also could be sued if the vehicle is still in your name.
Other Assets and Liabilities (Checking Accounts/Savings Accounts/Investments/Credit Cards) – Any accounts that are in joint name should also be separated regardless of whether there are assets in the account or liabilities. Removing a name from a checking account is normally as simple as making a trip to the bank (together) and signing new paperwork. The same generally goes for savings and investment accounts, once the hard part of deciding who gets what has been determined. It is probably most important to separate joint credit card accounts as this could be dangerous. Make sure, however, that you have a decent credit score in your name so you will not have a problem obtaining new credit after you divorce.
As for how closing joint credit card accounts will impact your credit, it’s difficult to generalize and would probably be best addressed on a case by case basis i.e., the credit history. It is possible that closing a joint credit card account with a long positive payment history could negatively impact one’s credit score. However, according to industry experts, even if there were a slight benefit to keeping the account open, such benefit does not outweigh the potential risks associated with being liable for an account over which you have no control.
Insurance – Ensure that all types of insurance such as health, life, homeowner’s are either canceled outright, if no longer needed, or moved into one individual name. There is no reason to continue to be responsible for your ex-spouse’s health care after the divorce as who knows how much he/she could accrue in health care bills or if he/she would file bogus claims to receive benefits. Consult your insurance agent to see what the process entails.
Retirement Accounts – In this case, you are lucky that retirement accounts are held in individual name. However, divorced couples often forget to remove their ex as their beneficiary. After working so hard to save for retirement, if something happened to you, would you want your ex-spouse to receive the fruits of your hard labor? Make sure you contact the plan administrator of your retirement account and fill out new beneficiary paperwork. You might have to prove that you are now divorced, as in some states it is required by law that your spouse be your beneficiary, but this is as simple as providing divorce documents. If you have life insurance, remember that once the insurance is in your individual name, rename a new beneficiary.
Legal Documents (Trust Documents, Last Will and Testament, Power of Attorney) – Last but not least, make sure to revisit the legal documents that you have signed while married such as trust documents, your last will and testament and power of attorneys, to ensure that they are redrafted accordingly to take out all mention of your ex spouse and replaced, if applicable, by people with whom you feel comfortable. Such documents are binding and need to be up to date at all times. This might cost you some money in legal fees, but you will have peace of mind that your legal and financial affairs are in order.
Protect yourself and your assets by doing what is necessary to separate your finances from those of your ex-spouse upon divorce. There is a reason you decided to live separately. Don’t keep financial ties to someone with whom you decided was not your life’s partner
Published or updated September 12, 2011.
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Great points. I raise these same points up on my attorney blog
Alot of times – divorce clients end up being bankruptcy clients – which can help the divorce pass thru easier – with no community debts.