Personal Finance

How To Separate Finances During a Divorce

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Editor's Note

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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, though, depends in part on how you deal with separating your finances from those of your ex pre-and post-divorce.

In most marriages, one person deals more with finances than the other. Warning: If it is not you, then you need to get familiar with your financial situation as soon as possible so that you are able to play a role in determining how your finances 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. Below are a few of the “majors” and suggestions as to how to separate them.

Physical 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 attorneys, cannot determine who gets what or how much, you will probably have to go to court where a judge will decide what equitable” means.

Do make sure, though, that unless an asset is sold, you'll need to make sure it winds up in only one person's name so that it's no longer held jointly.

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 naive 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 potential 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

Any accounts (checking, saving, investment, credit cards, unsecured loans, etc.) that are in the 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's probably most important to separate joint credit card accounts, as they could be financially dangerous. Make sure, however, that you have a decent credit score in your own name so you will not have a problem obtaining new credit after your 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. It’s possible that closing a joint credit card account with a long positive payment history could negatively impact your 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, and homeowners are either canceled outright if no longer needed, or moved into one individual name. There’s 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.

Also, make sure that your ex is no longer a beneficiary of your life insurance, should something happen to you. Not taking this step could wind your family up in a nasty battle in the future.

Retirement Accounts

In this case, you’re lucky that retirement accounts are held in an 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.

Last but not least, make sure to revisit the legal documents that you’ve signed while married - 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. 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’ll 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’s a reason you decided to live separately. Don’t keep financial ties to someone with whom you decided was not your life’s partner


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