When you’re in love, the idea of a break up or divorce feels silly. After all, it’s forever and ever, amen, right?
Not quite. More than 40% of marriages in the United States end in divorce. When faced with healing a broken heart and determining the next chapter of life, thinking about how to financially protect yourself in a divorce (other money matters) can make the whole process that much more stressful.
In addition to finding your footing as a newly single person, you’ll have to consider how bills get paid moving forward, says Erin Wood, the vice president of wealth planning at Carson Group. To add to the financial stress of divorce, some vengeful ex-spouses can wreak havoc in the courtroom, costing you even more. Here how to financially protect yourself in a divorce right now so you aren’t caught off-guard.
SUBSCRIBE: Get more tips on how to handle your money in the HerMoney newsletter, hitting your inbox every week — for free!
1. Legally Establish The Separation Or Divorce
Once you make the decision to separate, it’s time to legally file for divorce. This signals the start of your new life on your own, but it serves a purpose financially, says Jeremy Straub, the CEO of Coastal Wealth. Having this note on your financial files helps protect any money you make after that date. If you’re separated from your partner for six months before divorce proceedings begin, all of that income is yours. Without a legally binding separation, that cash could get split down the middle. This date also applies to decisions involving child support and alimony, he adds.
2. Get A Copy Of Your Credit Report And Monitor Activity
By being legally bound, you were subjected to partner’s actions. Even if your spouse was (and is) a trustworthy person, it doesn’t mean mistakes weren’t made.
“Anything that they did to hurt their credit score could have damaged yours as well,” Straub says. “Check your report for errors and continuously monitor to make sure the other person’s actions don’t affect your future.”
Take a few minutes to request a copy of your credit reports and go through them with a fine-toothed comb.
3. Separate Debt To Financially Protect Assets
Credit card companies do not care about divorce. You’re still liable for any debt your spouse racks up on jointly held accounts. It’s best to leave marriages with no debt, or only the debt that’s yours.
Straub recommends that if you have the money to pay off your joint credit cards, do so and then close the accounts. “If you don’t have the funds, you can always divide the debt in half and transfer to individually held cards and then cancel the joint ones,” he says.
You want to avoid keeping joint cards, even with a verbal agreement to pay. If your partner ghosts you, you’ll pay the balance.
4. Move Half Of Joint Bank Balances To A Separate Account
“As soon as possible, to open up a new bank account, and transfer 50 percent of the available funds to your new account,” says Robert Gauvreau, a CPA and founder of Gauvreau & Associates. “You should also ensure that any income from employment or other applicable direct deposits go into your new account.”
Revoking privileges or removing all of your own cash may feel dramatic as an initial step. But when you’re on the way to divorce, it’s best to untie all accounts right away.
In his more than 15 years in business, Gauvreau has witnessed many divorcees having to pick up the pieces after their former partner drained the bank of everything. He says the leading cause of financial chaos during a divorce is when the former spouses continue to have access to a joint bank account.
FIXX YOUR FINANCES: Get on Jean’s Money Makeover team right now through FinanceFixx. Divorce or not, make sure your money is right.
5. Comb Through Assets
When separating assets, some couples are nit-picky about who gets what. Emotions seem heightened even more in situations with infidelity or some sort of grave disruption of trust. Though it’s not always the case. Erin Wood at the Carson Group says that men tend to believe they’re going to get all of the assets, whereas women believe they won’t receive any.
As much as possible, try to set aside any feelings of guilt or retribution. Doing so will help you keep a clear, logical head and allow you to speak up for and defend what is yours. Getting a thorough and accurate understanding of what’s yours requires going through all of your assets — line by line.
“Usually the assets are split down the middle,” Wood says “But there may be assets excluded, such as inheritances or premarital assets.”
6. Conduct Cash Flow Analysis
The day-to-day divorce details can be all consuming. But as you’re negotiating who gets what, also look ahead and do some prep work for the solo life.
Doing a budget cash flow analysis will give you a sense of control over your finances. Laura Medigovich, a senior financial planner at Janney Montgomery Scott recommends adding the income streams you’ll have after your divorce and subtracting your expenses (broken down into “necessary” vs. “discretionary.”).
“If there is a shortfall, you can start whittling away at the discretionary items,” she says. “If there is a surplus, then breathe a big sigh of relief.”
Don’t forget to account for recurring expenses that you once split with your partner. The last thing you want are any major financial shocks once you’re out on your own. Review credit card and bank statements for the past 12 months. Pay attention to big-ticket expenses like health insurance, car leases, digital media subscriptions and others. Expenses can add up quickly when you’re suddenly responsible for footing the entire bill.
LISTEN: Whether it’s family and relationships or careers and investing, we cover it all on the HerMoney podcast. Listen wherever you stream your favorite podcasts.
7. Don’t Give Up Control Of Assets Or Investments
Divorces never take place overnight. And if your ex-other-half decides to drag their feet, it could take months or even years. That’s why protecting your investments and assets should start as soon as the separation is in motion, says Gauvreau.
“If you relinquish control in favour of your former spouse, they could drain these resources and you could be left with nothing,” Gauvreau says. “The more you retain, the greater control you have over the process and the greater financial certainty you will retain throughout the process.”
8. Create A Game Plan For Taxes
Often, couples forget to consider the tax implications of splitting up, Gauvreau says. It’s important to understand what you’re agreeing to before signing on the dotted line, otherwise, the split of assets could be less equitable than it first appears.
“If one spouse were to take the principal residence and another spouse were to take control over the retirement assets, there will be different tax implications towards the receipt of each asset,” he says. “The tax implications could be substantially different [and] result in one spouse losing much of that value to a future tax burden.”
Also consider alimony. Starting in 2019, alimony is no longer tax-deductible for the person paying it. The payments aren’t taxable income to the recipient, as long as your divorce occurred after Dec. 31, 2018. Review your filing status now that you’re a single person. For example, it could be beneficial to file as the “head of household.”
The Bottom Line
Medigovich encourages divorcees to do some soul searching to identify two or three key financial matters to help focus negotiations. For example, do you want the children’s college paid for by your spouse? Do you want spousal support for a certain number of years so you can go back to school and change careers or sharpen your skills? Do you want the family home? To make the best of a bad situation, come to the table with a clear idea of the things that are most valuable to you.