How to Navigate Your Finances through Divorce

Going through divorce means rebuilding your life–and your finances. Knowing what to do and working with the right professionals can make the whole process go smoother.

divorce

No matter the circumstances, divorce can be difficult. Not only are you dealing with an emotional situation, but you also have to handle logistics and finances.

I’ve been through a divorce, and, while it required some careful financial navigation, it wasn’t as bad as it could have been. Even if you think you’ve got the money angle under control, it’s a good idea to double-check. Here’s what you need to know.

Know the Situation

The first step is to know the situation. Gather all of your financial records as individuals and as a couple. You should have copies of:

  • Tax returns
  • Loan documents
  • Bank statements
  • Credit card statements
  • Investment account statements (including retirement accounts)
  • Insurance policies
  • Wills
  • Trusts
  • Property records (including real estate and car registrations

You should also have a clear idea of what’s in the household. From items with sentimental value to things with financial value, you should know what’s there. Take pictures of items that are particularly valuable.

Related: DR Podcast 297: The Blue Binder – How to Create a Financial Binder

Be sure that you know what’s owed and who’s responsible for it. Also, realize that if you live in a community property state, you might also be responsible for half your ex’s debt–even if it’s in only their name and it’s not joint debt.

Get Representation

One of the best things you can do is make sure your interests are represented. Now, this might not always be necessary. In fact, my own divorce was a “kitchen table” divorce. My ex and I discussed our finances, reviewed the accounts, and divided our things without the need for lawyers or mediators.

In the end, we divided everything up, established separate finances, and then took our agreement to a lawyer who drew up the settlement and filed it. It didn’t cost us very much, and it smoothed the process.

However, not everyone is so fortunate. If you suspect that your divorce might be more troublesome, get representation. You should have someone in your corner to make sure that you don’t get stuck with debt that’s unfair, or that you miss out on assets that should be yours. Did you support your spouse through school? Perhaps you stayed home, giving up chances at career advancement, in order to care for children. These are considerations that may entitle you to a portion of your ex’s assets–even if your name isn’t on the accounts.

Whether you use a lawyer or a mediator, keep track of hours, work done on your behalf, and make sure you’re getting billed fairly. Remember, too, that your representative is not a shoulder to cry on. They’re a professional and you’re paying for their time.

Consider the Tax Implications

Depending on the situation, you might be better off waiting until the following year to get divorced. Sit down with a tax professional and run some scenarios. There might be circumstances where you need to finalize the divorce regardless of the tax consequences, but don’t rush into it without consulting with a professional.

Find out what both of you can do to figure out how to minimize the tax bill as much as possible. My ex and I ended up with a hefty tax combined bill the year of our divorce. We might have been able to alleviate some of the cost if we’d consulted with a tax professional ahead of time.

You’ll also need to decide who will claim any children as dependents. You both can’t claim the same dependents. In many cases, the claiming ex is the one who will bear the primary responsibility for caring for the children. However, when multiple children are involved, it’s possible for each parent to claim different children.

Review Health Insurance Options

If you’ve been on your ex’s health insurance, you need to get new coverage. You also need to determine who will keep your children on their health insurance. In my case, my ex’s insurance covers our son, which is a great help to me.

However, without access to my ex’s work health insurance plan, I have to shop for insurance on my state’s exchange. I’ve been able to get a reasonable deal, but the reality is that for many people not having employer-sponsored health insurance is more expensive than getting it on your own. Make sure you budget for insurance costs, and that you’re ready for the increased expense.

Know How to Handle Retirement Accounts

You might be entitled to a portion of your ex’s retirement account. However, it’s important not to jump ahead in this situation. First of all, you need the proper documentation from the divorce court. Without that documentation, there’s a chance that taking your share will result in an IRS penalty.

Another thing to keep in mind is that if you have what’s called a qualified domestic relations order, you’re now an “alternate payee.” As such, you can access the assets in your ex’s 401(k), up to the amount ordered in the divorce settlement. Currently, you can actually withdraw assets under one of these orders without paying the 10% IRS penalty–although you still have to count the withdrawal as income.

Think ahead to potential divorce costs and costs related to setting up your new single household. Do you think you’ll need ready capital? If so, consider withdrawing the money directly from the retirement account before doing a rollover. Once you complete a rollover to an IRA, you’re subject to early withdrawal penalties if you’re under age 59 ½.

Talk to a financial professional about your options before you do anything with the funds you’re allowed from an ex’s retirement account.

Close Joint Accounts

If you don’t already have your own bank account, open one in your name. Then, work with your ex (you might have to do this through a lawyer) to figure out where the money should go so you can close joint accounts.

When possible, pay off joint credit card accounts, and other joint debt, according to the arrangement in the divorce settlement. The faster you can resolve debt, the better off you’ll be now and later. You don’t want to run the risk that your ex will miss a payment on a joint debt they’re now responsible for and bring down your credit score.

You might have to make other arrangements, though. If your ex is keeping a car with a loan in both your names, see if your ex can refinance the auto loan in their own name so you’re no longer attached to the debt. The same applies to a home loan (although in some cases, it’s better to just sell the house, divide any profits and move on). If the debt can’t be refinanced, take your judge’s order to the lender. In some cases your name can be removed from the loan.

With bank accounts, it’s better to divide the assets and close the accounts, unless you have a name removed from the account. In my case, my ex signed the appropriate paperwork to have his name removed from our joint checking account and he turned his debit card over to me for destruction.

Change Beneficiary Names

Go through estate planning documents, including wills, trusts, and life insurance policies to make sure you update beneficiary information. Remember, too, that the name listed as beneficiary on retirement and investment accounts supersedes what’s in your will. So, if your ex is listed as a beneficiary anywhere, you need to make those changes.

Related: Trust & Will Review – Fast and Affordable Estate Planning

Make a Plan

Finally, you need to make a plan for after the divorce. Consider bringing a financial planner in to work with your lawyer or mediator as you go through the process. A financial professional can help you understand the money implications of your divorce settlement, and help you work with your lawyer or mediator to help you get through this situation in a way that minimizes negative financial impacts.

Once you get through the divorce, you’ll need to rebuild your life–and your finances. Meet with a financial professional and create a plan for getting rid of any remaining debt, building your savings, and preparing for your future.

Topics: financial planningMoney and LifeMoney ManagementPersonal FinancePersonal Finance Tips

Leave a Reply