The most devastating cost of divorce is on the couple or family involved, but divorce can also be very damaging to your finances. Your income can be affected, and you might leave your marriage with a high amount of debt. It can also damage your credit score. Knowing how best to protect yourself can make divorce less expensive and hopefully a little less painful.
What are your financial obligations?
One of the main financial issues of divorce is the payment of alimony or child support. Child support payments vary state to state and are worked out by the state that the divorce was granted in. Most state’s take account of the income of each parent, the number of children that you have, and the custody agreement that has been reached.
If your divorce settlement orders you to pay child support, then you are legally obligated to pay it. Child support can be reviewed and adjusted periodically, so you should consider how the payments will fit into your monthly budget, and how they might be impacted by problems around bankruptcy and divorce.
Another potential financial obligation might be spousal support. Alimony is separate from child support and is usually a temporary measure to aid a spouse who sees their income drop dramatically after divorce. Spousal support usually has an end date. These payments must be incorporated into your post-divorce budget if the court orders you to make them.
Consider your budget if you’ll be the one who receives child support or alimony. These payments might be needed to cover your day-to-day living expenses. If you’re able to pay all your bills with your own income, you support or alimony might be extra. You’ll have to decide how to allocate that money.
You might want to use child support to start a college savings account or use alimony for emergency savings. Keep in mind that alimony has to be declared as income on your taxes, but child support does not.
You should also think about how to reshape your budget once the child or spousal support payments end. If you don’t have enough income to cover your expenses without them, you might have to think about a new line of work, getting new qualifications, or adjusting your way of life.
Division Of Property In A Divorce
Unless you have a prenuptial agreement, the laws of your state will determine how your assets are divided up after a divorce. Some states view assets acquired during the marriage as community property, which means that they are considered joint marital assets, whoever acquired them. These joint assets will then usually be divided equally in a divorce.
In other states, property division is based on equitable distribution. This doesn’t always mean ‘equal’. Many tangibles and intangibles will be considered by the courts when they decide how to fairly divide your assets.
What are your marital assets?
Before you go to an arbitrator, mediator, or attorney, you ought to do your homework first. List your material assets and get appraisals where necessary for possessions for things like art, antiques, and other items. You should have a handle on the values of assets including:
- Retirement plans
- Cash-value life insurance policies
- Stocks, bonds, and mutual funds
- Stock options
- Bank accounts
- Tax refunds
- Accumulated vacation pay
- Frequent flier miles
- Loans to others
- Artwork or antiques
- Collectables and tools
- College funds
All of these things will need to be addressed as part of your divorce settlement. You should also be aware of of any joint debt or liabilities. This could include the mortgage on your home, home equity loans, lines of credit, student loans, credit cards, car loans, or loans that you applied for together. As with your assets, liabilities like this might also need to be divided in a divorce.
Direct And Indirect Financial Impacts Of Divorce
Divorce can have a big impact on your financial outlook. In many cases, it can be a good idea and well worth spending the money on consulting a financial planner to assess the real value of all your assets, determine who is responsible for marital debts, consider tax consequences, and provide some financial planning advice before agreeing on a divorce settlement.
You should also think about the cost of the divorce itself. Hiring an attorney can get very expensive if you and your spouse can’t agree on issues like custody agreements, child support, or the division of assets. Dragging out the divorce could affect you for the long-term if you’re hit with a large attorney’s bill afterwards.
Consider A Prenup
If you decide to marry again after a divorce, it’s wise to draw up a prenuptial agreement. A second married can bring in children from your first marriage, and there’s potential for them and your new spouse to fight over assets if the wealth spouse dies. If your children are the trustees to the new spouse, consider if they are definitely the right people. It’s a good idea to work with a financial planner and estate attorney to over your estate plan if you marry again.
For example, martial trusts are one strategy. These trusts can provide for the new spouse during their lifetime and leave assets to the heirs after the death of the spouse. You will also need to consider which assets are best to leave behind. For example, it was once the best idea to leave your IRA directly to your adult children. Now, with the Secure Act in place, this might not be a good idea. Your children could be forced to distribute the account within ten years, instead of taking distributions based on their mich longer lifetime and stretching the IRA’s tax deferral for decades.
Deciding which assets go where is more complicated than it once was, and should be decided on a case by case basis.
How To Protect Yourself Financially In A Divorce
A prenuptial agreement can offer both you and your spouse some financial protection if you get divorced. If you were married without a prenuptial agreement, you next best line of defence to protect your finances is knowledge. It’s always important to act as partners in a marriage, especially when it comes to finances, each spouse needs to educate themselves about finances in divorce. Both spouses should be aware of their debts, investments, family income, and any other assets.
If you can see that a divorce is on the cards, then it could be a good idea to close any joint bank accounts and open individual accounts instead. Speak to your attorney before you take any assets from a joint account. Cancel any credit cards that are jointly held, and open new cards to prevent your spouse from generating any new debt under your name. If you plan to buy a new home during divorce proceedings, make sure you are aware of the legal requirements and restrictions.
Closing accounts and opening new ones can dent your credit score for a short time. New credit inquiries can knock a few points off your score. It can be worth taking a minor negative credit score to avoid accumulating new joint deb for which you could then be held responsible for.
Keep track of your income and expenses. This is always smart to do but is especially wise during the stress of a divorce. Track and document financial details including child support, alimony payments, shared medical and other expenses. There are lots of personal finance apps that you can use to keep track of these details and avoid financial struggles. Stay on top of your new lower income by creating a budget. You can control your spending easily by doing this.
After your divorce has been made final, and your assets have been legally divided up, change the names on house deeds, stocks and bonds, and car titles as needed. Make sure you remember to change the beneficiaries on your investments, retirement plans, life insurance policies, and savings accounts. Update your will as well to reflect your new circumstances.
You shouldn’t take unsolicited advice, no matter how well-intentioned it is. You’re bound to be offered all kinds of advice from friends, family members and co-workers. They’ll want to tell you tales of disastrous and amicable divorces. Only heed the advice of those you really trust and remember that advice is only that. The decisions that you make are up to you. Only take legal and financial advice from a lawyer or financial professional that you trust. They can help objectively and offer the most effective and beneficial advice and strategies.
Try not to tell everyone about your business. When emotions are high, this can be tough, but as there is so much personal information involved in the divorce process, it’s better to keep the details of what’s happening private and confidential.
Divorce can be devastating financially for both parties. You can get through it with your finances intact. Educating yourself and taking some precautions can greatly reduce the financial impact you and your children.