Handling money and divorce at the same time can be tricky. Divorce can be a pretty scary time even without thoughts of your money and how to handle it. Along with the stress of separating families, friends, and lives, you now how to figure out how to take over your own finances, pay for an attorney, and side-step financial obstacles as they get thrown at you.
I won’t lie to you. This is going to suck.
This won’t be fun. This certainly won’t be easy and you’ll need a support system that extends far beyond me. But like any time of transition, this won’t last forever. As hard as this will be, you’re also given a new opportunity to decide what you want your life to look like.
You get to choose how this story will end.
This is a subject close to my heart as I help an amazing woman in my life navigate these waters. I wanted to reach out to people who had gone through a divorce to see what they wish they had known. I also wanted to reach out to experts in this field to ask what they want people to think about when going through a divorce.
The Best Tips and Tricks for Handling Money and Divorce:
Elizabeth Colegrove of Reluctant Landlord suggests putting everything in writing (i.e. all of your expectations) regarding real estate holding. Identify who pays for what, how the assets will be split and the implications if you name is on the mortgage and not title, and vice versa.
Adjust your taxes.
Act as soon as possible on adjusting your tax withholding. If your filing status changes, you could end up with a significant bill. You can learn more about that here.
Change your beneficiaries.
Miranda, a Busy Budgeter reader, wants to remind people to change your life insurance beneficiaries. It's easy to overlook and the results can be disastrous.
Create a budget.
The first thing that anyone contemplating divorce should do, is to prepare a monthly budget, being as detailed as possible. Include both fixed expenses such as housing (mortgage or rental payments, insurance, utilities etc), and variable expenses, such as clothing, travel, meals outside of the home etc.
Get a good handle on exactly how much you will need in order to survive.
Whether you will be receiving alimony and/or child support payments from you ex-spouse, or you will be the one making the payments, you will need to have a good handle on your own living expenses. – Anthony Leonardi
Do not go into the process of divorce naively or with your head in the sand.. Do not believe that your ex-spouse will be fair and reasonable with you. They may have been fair and reasonable people when you were married, but the divorce process, and the attorneys involved in the process, have a way of bringing out the worst in people.
Be prepared for a long battle. Often, people going through the process become worn down and exhausted by the whole thing, and it’s at that point that they throw up their hands, and give in, in an attempt to be done with it. – Anthony Leonardi
Prior to hiring attorneys, talk to your ex-spouse and suggest that you try mediation. Mediation can be a more reasonable and cost effective way of settling your financial differences as the mediators job is to find common ground, as opposed to an attorney's job which is to win while dragging out the process for as long as possible, as attorneys are paid by the hour, and usually handsomely so.
Always keep in mind that in a divorce where there are finances to negotiate, no one leaves happy. The spouse that is required to pay alimony and/or child support inevitably believes that they are “Paying too much”. The spouse who is receiving support inevitably believes that they are not getting enough. – Anthony Leonardi
Divorcing individuals must get organized before they enter the legal process. When finances are an issue, gather all financial documents. Make of list of each asset and a list of all of your and your spouse's income and expenses. Whatever you don't know – make a list of what you think may be there. Ideally do this with the help of your spouse. – Pam Friedman CFP®, CDFA™
Learn to compromise.
If you can work with your spouse, make as many decisions as you can before getting legal advice. While legal advice is important, attempting to assert every right you have or think you can get in court will make the process longer and more costly – and cause more headaches. The law is there
to protect you but not to get you every last penny you might think you deserve. Divorce works best when everyone recognizes that everyone will need to give up something. Ideally for your financial future, you and you spouse decide the division and an attorney then properly documents your choices. – Pam Friedman CFP®, CDFA™
You need cash to live… not investments.
You'll have to give up something and plan to live on less so think that through before you divorce. Ideally leave the marriage with cash accounts or assets that can be converted quickly to cash without a big tax penalty (IRAs) or expense (some property and investment accounts). You may think you can sell your home quickly but what will you do for cash until it sells. You may want to keep the home because it may grow in value or to maintain stability, but that stability is lost when there isn't enough cash to maintain it. You may be forced to sell well below market just to stay
afloat.- Pam Friedman CFP®, CDFA™
Understand the tax implications of your investments.
Taxes on investments and retirement plans are complicated and those complications impact value. Learning the tax basis of each investment will help determine its cash value. For example, a wife
is awarded land worth $100,000 but it was purchased for $10,000, $90,000 will be taxed as a capital gain when she sells it. If the husband was awarded a $100,000 savings account. So what looked like and equal distribution ($100,000 worth of land to the wife and $100,000 savings account to the husband) wasn't.- Pam Friedman CFP®, CDFA™
Most clients regretted not being more methodical, calculating or simply just planning ahead for financial issues. Strategy is key. For example, some thought because their estranged spouse had never drained their joint account, or liquidated assets that this would never happen. So they failed to act to protect themselves. In most cases, they were too trusting of the status quo.
It was only when one morning, they awoke and discovered they were left without operating cash, they realized they too could have removed a chunk of money themselves and disclosed it upon their filing documents. This would have given them the funds necessary to sustain themselves through the expensive process.
Even though some were left for other partners, if their estranged spouse contributed money to their account for living expenses, they procrastinated in taking control of the situation hoping if they were ‘nice', they'd get a better settlement or even more surprising, hoped their spouse would return. – Vickie Adams, CFP.
Beware of joint debt.
The joint debts sometimes count towards your debt to income, even if a judge rules that your ex is the responsible party. This can limit your borrowing power depending on lender guidelines. – Stacy, a Busy Budgeter reader.
Check your credit report.
Absolutely check the credit reports! A friend of mine just got divorced and found out that his ex wife opened 27 credit card accounts in joint name without his signature. She filed for bankruptcy and the creditors came after him. – Debi, a Busy Budgeter reader.
Child support isn’t a sure thing.
Don't expect money from your ex. Sometimes ex's won't pay or hide money and you get very little. I know I don't budget my child support as it isn't a guarantee. I know I should be getting more than I do, but it isn't worth the expense of hiring lawyers to get more. This is my healthy way of dealing with it. The most important thing is my children and I will support them best I can. – Staci, a Busy Budgeter reader.
(Note: failure to pay child support can result in wage garnishment, warrants, and even arrest but even with those penalties, child support still isn’t always paid as directed.)
Know the basics of money and divorce.
And finally, I sat down with my favorite divorce expert… Valerie Rind, author of the award-winning book, Gold Diggers and Deadbeat Dads: True Stories of Friends, Family, and Financial Ruin to get her take on the most important aspects of divorce and money.
If a couple has separated and plan to divorce, do they need an attorney to figure out things like alimony and child support or is it best for the couple to work it out together?
The best path is to do both. First, agree on as many details as you can. The minute you lawyer up, it gets expensive. But it’s critical that each of you meets with a separate attorney, no matter how “amicable” your situation seems. You likely are unaware of the divorce laws in your state, including what your obligations or entitlements are. – Valerie Rind
What does a couple do when there is debt and bills in both of their names? How can they protect themselves if their spouse doesn’t pay?
It’s best if they can cooperate so each can protect their credit history.
First, close the joint credit card accounts so neither person can add new charges. Next, decide who will pay the outstanding charges. If you don’t have the cash to pay your share, look for a low-cost balance transfer to another credit card.
Include in your divorce settlement what your obligations are. However, if your ex-spouse doesn’t pay, the bank or credit card company will still hold you both responsible for a joint debt. It sounds crazy, but the bank doesn’t care about your legally binding divorce agreement. The divorce decree is between the couple and the court. You’ll both always be liable for joint debts until they are paid, no matter what you agreed privately. Therefore, it’s best if you can find a way to pay the debts before divorce – even if you have to sell assets – rather than relying on someone’s “promise” to pay. – Valerie Rind
Is there a cheaper alternative to divorce?
Mediation is an alternative to traditional divorce. A neutral mediator helps you and your partner negotiate the various issues relating to debts, assets, and custody. Ultimately you do need separate attorneys to review your divorce agreement. If it works, it might be a faster and less costly process. However, there’s no guarantee you’ll be able to agree – in which case you’d need to start all over with lawyers.
A more contemporary approach is collaborative divorce. It’s sort of a combination of traditional divorce and mediation. You each hire specially trained lawyers to help you reach an agreement. But like mediation, if it doesn’t work, you go back to Step 1 – but you can’t use the same lawyers. – Valerie Rind
What are the most important things that someone facing a divorce should think about in terms of money?
Open checking, savings, and credit card accounts in your own name if you don’t already have them. Understand that it's expensive to divide one household into two – somebody always gets custody of the pots and pans. Even if the court orders that you are entitled to alimony or child support, don’t ever count on getting it. – Valerie Rind
What do you wish you had known about divorce?
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