The reality is staggering: as of 2005, around 41 percent of all first marriages end in divorce1. Taken by itself, the sheer emotional toll of that split can rock any individual. After the personal trauma, though, comes the financial realities of it all – and they can be even more harrowing. Even if both you and your spouse have agreed that it’s the best way to escape an otherwise difficult, uncomfortable or painful marriage, the financial side of divorce isn’t often a topic that we want to face.
In a marriage, many important financial aspects of each party are merged together. You’ve combined insurance, health care, and often your assets as well. Even your credit reports become intricately entwined together.
While three out of four divorcees will remarry within three years, it takes much longer to fix the debt and credit rating damages caused by legal split. For instance, it’s likely that both of you are on the same credit card account. The two of you will need to decide who is responsible for that credit card debt – and if it is a joint responsibility, how are you going to pay it off together?
Aside from just figuring out how to assign credit card debt, imagine what could happen if the other party doesn’t pay their portion of that debt and allows it to go into collection. What happens if your former spouse adds more debt to that credit card and then refuses to pay it? The repercussions can financially destroy both of you.
To prevent this kind of devastation, there are a number of steps you can take before, during and after the divorce proceedings to help you get back on your feet quickly and as painlessly as possible.
If you’re feeling that your marriage is heading towards the brink, it may be a good idea to consider the financial repercussions and consider the asking for the help of personal financial advisors. You’ll need to set up bank accounts in your own name – both a checking and a savings account. Make sure that your name is on them and not your spouse’s. You don’t want to experience a bad situation where the other spouse decides to write bad checks or abuse your joint bank account and tarnish both your ability to open a bank account and your credit.
Tuck as much money as you can into these accounts. On average, a woman’s standard of living drops 45 percent in the first year after divorce, whereas a man’s standard of living increases 15 percent. It’s critical, then, for you to have money tucked away that only you can access.
Secure your savings. When putting away for these emergency situation, it is important to not only put them into a liquid account but a secure account. Consider high-yield online saving accounts from reputable banks such as E*Trade or HSBC Direct.
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This may pose a big problem to the spouse who has not been very involved in the family finances. That spouse will have a difficult time obtaining money to set aside, or even knowing how much is financially available within the family. He or she will also be at the greatest risk of financial difficulty when the marriage goes south and the divorce date hits.
To protect yourself from such a fate, your first crucial step is to locate some final information regarding your family’s finances and watch your finances closely with and expense planner like Mint. Try to obtain the balances, contact names, addresses, phone numbers, and transaction statements for the following accounts:
- Credit cards – make sure to include joint credit cards as well as individual credit cards if possible
- Mortgage – look for monthly payments, payoff amount, remaining balance, and pre-payment penalties
- Brokerage statements
- Marital assets (artwork, antiques, etc.)
- Joint bank accounts – including checking and savings accounts
- Safe deposit boxes – try to get a copy of the keys and/or combination information and find out what’s being stored in each box
- Wills and trusts – this is of high priority, not only for your own will but also for other family members
- Business interests
- Pension funds
- Social Security – Go to the national Social Security Web site to find out how to obtain this
- Insurance (home, auto, life) – also make sure you are a beneficiary or are included in all these insurance policies and have full access to them
- Medical coverage – check into COBRA options as well, to keep the insurance if you were covered under your spouse
- Tax returns – try to get at least the last three years of these records, if possible
- House Value – if you have had an appraisal recently, try to get a copy. Otherwise, look into home values in your neighborhood for houses of similar size
- Loans – try to get a copy of both the original loan agreement as well as your current balances, payoff amounts, and the timeline for paying the loan
- Inheritances – you may already know about your own inheritances, but you’ll want to obtain your spouse’s as well, as this counts as additional income for them
Don’t forget to also ensure that your name is listed on the utility accounts for your home or residence. This could include the phone bill, electric bill, water bill, trash bill, sewer bill, gas bill, television bill and/or internet bill. Without these, you can’t make payments on these utilities – or cancel them.
As long as you’re smart about your finances and do as much research as possible on all the family assets, you should be able to survive even a very painful and difficult divorce with your credit rating still intact. Keep your head up, stay focused, and don’t lose sight of your end goal – financial freedom!
Mint’s Take Away:
If you are truly in the mist of a divorce, the last thing you’ll be thinking about is going through a check-list via an online website; divorce is a difficult process, no matter the reasoning behind them. If you truly want to protect yourself, here are three quick things you can do to avoid some financial downfall, once the divorce occurs:
- Freeze your joint bank accounts – call banks and tell them to freeze your joint accounts so that they require both signatures for each transaction. This prevents your spouse from withdrawing large amounts of money without your approval.
- Check your legal ID – If you’re going to be changing your name with the divorce, some states require that your ex-spouse signs paperwork before issuing you a driver’s license or ID in an old name or maiden name or to remove hyphenation in a name.
- Freeze your joint credit card accounts – do this in addition to your bank accounts, if applicable. You’ll want to set up your own credit card in your name, if possible. Remember to inform them in writing as well as over the phone. You can also have the accounts closed, so that you and your spouse can’t add debt to them but remain responsible for paying them off.
While these tips and the previous information will help protect you from some seriously damaging financial difficulties, freezing your accounts won’t get you off the hook – only by paying them off will you be able to actually close them. Even if a court orders your spouse to pay off certain debts, they are still your responsibility until the balances are cleared.
1. Dan Hurley, “Divorce Rate: It’s Not as High as You Think,” The New York Times, 19 April 2005.