You never thought it would happen to you. Divorce is one of those messy life situations that can catch you by surprise and have some serious financial consequences.
That’s why it’s important to take the steps to be ready when these situations arise. It doesn’t matter what stage you’re in. Know your options, know your rights, and you can get through your divorce in one piece with some hope for the future and money in the bank.
How to protect your finances before you get married
Obviously it seems silly to go into your marriage anticipating a divorce down the road. But it doesn’t hurt to set some boundaries going into your marriage.
Taking the necessary steps is easy to do and helps give you a solid financial footing before tying the knot. As long as these steps don’t create hostility, it’s in your best interest to keep some of your finances separate before combining all of your assets and debts.
Here are some things you can do:
Build a good credit history
Having good credit in your own name is essential to having financial stability before marriage and after divorce.
Once you close your joint accounts in the divorce process (more on that in a bit), a good individual credit score will help you get through the period of figuring out what comes next. And if you don’t have any credit in your own name, it’s not too late to start working towards that.
Keep a separate bank account
If things get messy down the line, it’s helpful to have your own account to transfer a portion of any joint funds into when the divorce talks start.
In some situations, you might need to act quickly, so having an account set up could save you some headaches.
Sign a prenuptial agreement
Signing a prenuptial agreement can be an effective tool for simplifying a long and painful divorce procedure. And if this helps you shorten the divorce, not only will it get you peace of mind faster, but it will save you money.
It’s not the most romantic gesture, but it’s one that should be considered seriously before entering into a marriage contract.
Prenups can help you:
- Keep finances separate if one partner is considerably wealthier than the other
- Limit alimony payments
- Protect your business in case your ex decides to claim a portion of it or your income
- Determine how to divide up property in a way that you choose beforehand without being at the mercy of the court
- Limit your debt liability if your spouse has a high debt load and you want to avoid paying for it when you split up
How to protect your finances while you’re married
Here are a few practices I recommend for keeping your finances in good health and preparing yourself for unexpected circumstances, including a possible divorce:
Some of the same habits that help you stay on top of your finances in general will help you through your divorce. Being organized is a key one.
Make copies of marriage certificates, wills, deeds, account numbers, tax returns, account statements for deposits, mortgages, credit cards, and loans that you and your partner share. A lot of this information can come up and will be needed throughout the divorce, so keep track of it in a spreadsheet or list.
If your shared home is registered under only one partner’s name, the non-owning spouse can apply to register for a Home Right Notice.
So let’s say your shared home is only registered to your partner and then you get divorced. This will allow you to stay in the property and it protects you if your partner decides to sell the house.
You’re protected while divorce negotiations are happening and it ensures that your partner cannot sell the house without your consent.
So to cover your bases, this is a no-brainer if you plan to move into your partner’s home once you get married. And even though living under the same roof while going through a divorce might be pretty uncomfortable, at least you won’t be paying more in rent before you have to.
What to do when your marriage is headed for divorce
You can see that your marriage is on the rocks and it can’t be saved. Here are some steps you can take before separating and/or entering into divorce proceedings to help protect what’s in your wallet.
Identify cash sources
A divorce can cost a lot of money, plain and simple. Start identifying any resources that you have to help pay for it.
These can be your own property (e.g. mutual funds, stocks, and bonds, a savings account), borrowing money against your retirement savings, taking out a second mortgage on any real estate, or any money you could borrow from family members and any really good friends.
Be sure to talk with a financial advisor or a professional accountant about the implications of taking out a second loan on real estate, selling mutual funds, stocks or bonds, and borrowing against your retirement fund.
Take your name off documents
If one of you is moving out of a shared residence, you should consider taking that name off of any bills. These can be hydro, internet, utilities, cable, property maintenance, or cleaning services, and the lease if you are renting the place.
But if your partner can’t maintain these services on their own, it might look bad on you in court. This could end up costing you in the long run with a less favorable divorce agreement.
Get your joint accounts sorted out
Keep good records
Always ensure that your records are kept up-to-date so that you can review any new account statements as they arrive. That way if your spouse withdraws money during divorce proceedings for something other than paying for legitimate joint marital bills, they can be ordered by the court to reimburse your joint account if they
Open your own account
If you don’t already have one, go to a different bank than the one with your joint account. Open a checking account there in your name only.
Lower the balance of your joint account
Deposit some of the money from your joint account into your individual account. This is a good way to protect yourself in advance in case divorce proceedings get ugly and there’s any sort of attempt of revenge.
This way, they also can’t use up your joint assets to prevent you from getting a portion of them in the divorce. Make sure you only withdraw a reasonable amount of money from the joint account (what is considered “reasonable” will later be decided by your attorneys, so don’t take out any more than half of the balance to be safe.)
Keep your partner in the loop, when possible
It’s probably best to inform your partner that you are withdrawing your share of balance so they can do the same thing.
Not only will this help avoid some difficulty in the divorce negotiations, but it can ensure that you both leave enough money in the joint account to pay the remaining bills.
There is no need to default on payments, have your checks bounce, or have creditors coming after you since these will just cost you more time and money.
Get a copy of your credit report before closing the account
Getting a copy of your credit report through AnnualCreditReport.com can confirm what you owe on any loans and credit accounts that you and your spouse share.
If you can’t close the joint account because of an outstanding debt that can’t be immediately paid off, be sure to write your creditor. Explain that you won’t be accountable for any additional debts put on that account above the current balance in case your spouse tries to open more credit in your name. Now you can close any joint credit card accounts, or at least cancel or reduce any joint lines of credit.
Protecting your finances during the divorce
You’re in it now. It’s past the point of reconciliation, and separation didn’t cut it. When you and your partner decide to legally split, here are some simple steps to take to protect yourself and your finances:
Get a lawyer you can afford
You already know that “living within your means” is one of the most important strategies for protecting your finances. This is especially true when dealing with divorce since it’s hard to know how long the negotiations will last, and how much they will cost you. Hiring a lawyer you can afford to pay sounds obvious but your legal fees will be a big part of the overall divorce process.
Not many family law attorneys will agree to take you on for a flat fee. If you have to find a lawyer who bills hourly and you don’t have money to burn, you might be able to save some money by going with a relatively inexperienced one instead of a seasoned pro. They might not have as robust of a reputation, but they could be willing to work that much harder for you to make a name for themselves.
Appraise your assets and liabilities
Do some ground work on taking stock of your assets when you’re heading into the divorce. List the values or get them appraised if you don’t know their value. Some of your assets include:
- Your house
- Any other property
- Bank accounts
- College funds
- Income tax refund
- Cash value of life insurance policy
- Retirement savings
- Money you’ve lent others
And do the same for any liabilities or debts whether they’re your individually or jointly owned with your spouse. These could include a mortgage, student loans, credit card debt, car payment loans, or lines of credit.
All of these can be split in the divorce, and you need to know exactly what you’re bringing into it to get the best outcome.
Manage joint debt
Come up with a payment agreement for any joint debt. Even in a divorce, your debt isn’t split in two. And with a legal agreement stating each party is going to take on half of the joint debt, you can still be pursued by creditors if your ex defaults on their payments or fails to repay entirely.
Remember that you can jointly own property and split that up, but with debt, you are still responsible for your partner’s payments if they default or have to file for bankruptcy.
Find cheaper alternatives to court
A less costly divorce method could be mediation or arbitration out of court. You’ll save a ton on hourly legal fees that can add up, and it might be a more civil atmosphere when you talk directly with your partner to make things easier.
As long as you reach an agreement you’re both happy with, you might as well save some money in the process.
What to do after the divorce
Expect financial changes after going through a divorce. It’s pretty rare that it will improve your financial quality of life. It just costs more to live separately and pay for two houses, two sets of utility bills, legal bills from the proceedings, and so on.
Here are some important steps:
Create a budget
Your budget should reflect your new income and living expenses.
Maybe you are without a car and have different transportation costs. Or you have to manage your debt differently after picking up some of your spouse’s student loan payments. You can always talk to a financial planner to create a realistic short-term and long-term set of goals to get you through this next period, and it’s best to be proactive to stay ahead of these new lifestyle changes.
Hang in there! This difficult time won’t last forever!
Address alimony and child support
It’s important to budget for monthly payments of alimony and/or child support once your divorce agreement has been reached. These can be pretty significant. Even though there are usually end dates on both of these, you should be on top of them when you’re re-evaluating your finances now that the marriage has ended.
If you’re receiving alimony or child support then you need to figure out how to distribute this money. Since they’re meant for helping you meet your everyday expenses, you may have other options if your income is meeting those already. For example, you could put child support payments in a college education savings account and do the same with alimony but in another savings account for future emergencies.
And lastly, remember that child support does not get reported as income when you’re filing your taxes but alimony does. Likewise, you can report alimony as a deduction if you’re paying it out.
Change your will or living trust
Don’t forget to update your will or living trust after a divorce. We know, it’s one more thing to put on your to-do list, but it is very important.
Dealing with student loans after a divorce
So you’ve joined the 40-50 percent of Americans who flunk out of marriage school every year. And as a consolation gift, you get to pay for your ex’s student loans. Seems pretty unfair! But protecting your student loan finances through a divorce is manageable.
Remember: Individual loans are still yours to pay off
How your loan payments are affected by divorce essentially comes down to whose name is on the loan.
Remember that your individual student loans from when you were single are still yours to pay off when you get married and divorced. Likewise, you don’t automatically take on responsibility of your spouse’s loan when you get married, so it is still theirs to pay off after you’re no longer a couple.
Co-signing on your spouse’s new loan
If your spouse went back to school while you were married and you signed off on the new loan, you need to figure out a plan for splitting up the payments.
Their loan will appear on your credit report and you are responsible for paying it off when they can’t. Until a divorce agreement is reached, it could affect your ability to take out another mortgage or any other new credit or debt. Creditors can also come after you and your tax refund.
Consider state laws (and other factors)
After a divorce, student loans can get a bit trickier. You have to take multiple factors into account like your state’s laws, if the loans led to a greater income and standard of living, and the judge’s decision. And Federal loans will be split differently than private in a divorce.
The bottom line is that individual loans are still your responsibility. As for how to manage loans that have both your names, you should consult a professional to see what details you missed when coming up with an agreement.
How to deal with life insurance after a divorce
This is a pretty big topic. Your life insurance policy during marriage will likely be connected to your partner in one way or another. They are probably listed as your beneficiary so that if you die, they get the payout and can take care of themselves and your children. Your first step should be to talk with a financial advisor about your specific situation.
But if getting life insurance is right for you, I recommend you get it earlier on in the marriage. Your premiums will be lower if you take out a policy when you are young and healthy. I’ve had great experiences with Allstate but I’ve also heard great things about Liberty Mutual.
Here is what I recommend you do in the following separation scenarios:
If you have no children
If you don’t have children and you have no financial obligations to your spouse, then it can be as simple as changing the beneficiary of your policy to someone else when you are filing for divorce.
If you have children
It might actually make the most sense to keep your spouse as your beneficiary since your children can’t directly receive the benefits of the policy until they turn 18.
You can designate a trustee to manage the finances of the account until that time, but it might be best to just leave your ex as the beneficiary for the kids’ sake.
Transferring ownership of a joint policy
One of you can take ownership of a joint policy while the other would look into purchasing a new one. If you get the new policy then you should calculate how much your ex should give you for premiums you’ve already paid until now.
Since you won’t be getting anything when the policy pays out, you should get something back.
Cancelling the policy
There may be financial benefits to cashing out your joint policy and each of you taking out new ones, but you need to do the math. It depends how long you’ve been paying into it and how healthy you are.
Keep in mind that if you choose to cancel your life insurance policy which you took out at a younger age, your new premiums will probably go up.
So how you change your life insurance policy really depends on if you have children or other dependents, and on the nature of your relationship with your ex throughout the divorce. Just be sure that whatever you decide to do, you never miss a payment or the policy will lapse leaving you with a policy-sized hole in your wallet.
You have our sympathies if divorce is in your future. It can be emotionally draining, and your personal circumstances are in for some major changes. Just remember that you absolutely can come out ahead and protect your finances with some planning and perseverance. Stay strong and you’ll make it!