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Getting a divorce is expensive. Over 600,000 Americans get divorced every year. The median cost of these divorces in the USA is $7,000 while the average is somewhere between $15,000 and $20,000. But contested and complicated divorces can be far more expensive, costing upwards of $100,000. However, the cost of the divorce itself is far from your only financial expense when ending a marriage.
Getting a divorce affects pretty much everything in your financial life: from your cash flows to your home ownership status to your retirement accounts and much more. It can be easy to get overwhelmed, but the more organized you are when it comes to your financial life when approaching a divorce, the simpler it can be to manage and the more money you can save in the end.
In this starter guide, we will take a look at all of the general components to consider when looking at your finances as you approach divorce. By the end, you should have a good idea as to where to start when it comes to organizing and tracking the various financial pieces of your life to help you make the best decisions as your marriage ends and your new life begins.
When it comes to finance and divorce, one of the most important distinctions to keep in mind is the difference between separate or common law property versus community property states. Much like the name implies, the law distinguishes between treating property that one spouse owns as an individual as separate from community property which is jointly owned by both spouses. In community property states, most of the assets may be divided up in half for each spouse.
The laws regarding how various assets and debts are treated vary greatly depending on the state you live in as well as with regard to separate versus community property. There are nine states that currently have community property laws on the books. These states include:
In general, no matter whether your divorce is occurring in a state with community or common law property, it is very important for you to establish your own independent financial identity separate from your spouse when getting divorced. There are different ways to do this. One of the most important tasks is establishing things like bank accounts and lines of credit (credit cards) in your own name. If your accounts are all owned jointly, you will want to establish your own bank accounts and credit cards as an individual as soon as possible.
Oftentimes, assets and debts acquired by an individual spouse before the marriage will be considered individual, separate property belonging to just one spouse. For example, bank savings or investments you had prior to the marriage may be considered separate property; similarly for student loan debt taken on before the marriage. On the other hand, assets and debts acquired during the marriage – including the salaries of both spouses and a home mortgage taken out in both names – may likely be considered joint property belonging to both spouses.
As soon as you know you are getting a divorce, you want to organize your financial life as much as possible. This means taking stock and making an inventory of all the accounts, assets, debts, investments, and everything else you and your spouse have that is tied to your financial situation.
There are a number of ways to get organized when it comes to your finances. One of the first things you should do is get a copy of your complete credit report from all three credit reporting bureaus. This will hold a lot of key information that will help you get organized including various accounts and balances.
When it comes to bank accounts, create a comprehensive list of all checking, savings and special bank accounts that you and your spouse have. Make sure to note which ones are individual accounts and which ones are held jointly. If your divorce is pretty amicable, you may want to visit the bank and close your joint accounts, which is the easiest way to dissolve these.
If you don’t already have an individual bank account, make sure to open one now.
With credit cards, you may have an individual line of credit, a joint credit card, or an individual credit card where your spouse is listed as an authorized user. If your spouse is an authorized user on your card, you should remove them immediately and they should do the same for you. For joint debts, you will either need to pay them off now, later, or wait and see the outcome of any court decisions. When a divorce is amicable and uncontested, you may simply want to arrange to pay them off and close down the account with your spouse now. In contested or more complex or combative divorces, it may make sense to do nothing at first and see what happens in court.
When it comes to divorce, investment, and especially retirement accounts like 401ks, 403bs, and IRAs can be a bit more complicated than financial instruments like checking accounts and credit cards. Make sure that you know the exact details of each account you have and have at least a year’s worth of financial data about it. Sometimes it may even be worth liquidating investment accounts of securities before divvying them up, but be careful because this can also trigger various fees and tax consequences.
Any retirement accounts governed by the Employee Retirement Income Security Act (ERISA) – 401ks, pensions, etc. – will need a special court order called a Qualified Domestic Relations Order (QDRO) in order to divide them up. This QDRO will need to be approved by your retirement plan sponsor. It is important to remember that it can take time and money to acquire a QDRO with the right approved language, so make sure to plan accordingly and share the costs with your spouse if possible and appropriate.
Another aspect of finance to take stock of when getting a divorce is your spouse’s social security benefits. If your marriage has been at least ten years long, you are entitled either to 50% worth of your spouse’s social security benefits or 100% of your own – whichever value is higher. Claiming this money does not take away any money from your spouse and can help you with retirement. If you’ve been married for just under ten years, it might even be worth considering sticking it out a little bit longer to gain this important financial benefit.
When it comes to divorce, real estate can be a bit messy. If you have a joint mortgage, you can’t be released from responsibility just on grounds of getting divorced. So you will need to make a decision about whether or not to sell the home and split the proceeds, or keep the home and allow one spouse to buy the other out. In the latter case, you will also have to refinance any mortgages in their name only for the spouse being bought out to be released from responsibility for the debt. Some couples choose the possibility of co-ownership of a house, but this can get ugly in a contentious divorce or anything less than a very amicable situation.
When it comes to your former home, leave emotion out of the financial process. You do not want to keep property you can’t afford to finance on your own. Also, make sure you get the house appraised before selling it so you know its true worth. In a contested divorce, each spouse should get their own appraisal of the value, and the differences between these two appraisals can be averaged out by the courts.
There are nontraditional assets that can be a bit more difficult to handle. These may include:
Again, getting an accurate appraisal of such items is important. Do not jointly continue to own these assets, but decide which spouse gets what value from them or gets to keep them if you do not liquidate them. It may be worth asking for professional advice from an accountant or other divorce financial expert like a Certified Divorce Financial Analyst (CDFA).
As we’ve already noted, divorce is expensive. But that doesn’t mean there aren’t some financial benefits to getting a divorce. Here are a few of those benefits you’ll want to keep in mind.
When you are no longer married, you gain much financial freedom and control over your money. It is possible that you and your spouse had different financial goals, risk tolerance, senses of frugality, or other characteristics that could have made your money life very difficult.
But when you get divorced, the assets and debts now in your own name are yours to control. This can be a big relief when you and your spouse had misaligned attitudes toward money. For example, if they were a spender and you are a saver, you can now probably save a lot more money. Similarly, if you are risk tolerant and they were risk-averse, you can be more aggressive with your investments. This can help ease a significant amount of financial stress for you, and you certainly won’t miss fighting with your spouse over money.
You can now pay down your debt at a rate you think is appropriate while spending your money on your true priorities alone. These could be anything from buying a new car to traveling to saving for your children’s future education.
Most of the time, when you withdraw funds from a retirement account before you hit retirement age – 59 ½, – there is a ten percent penalty you must pay in order to access this money early. But a divorce is a qualifying financial event that allows you to withdraw these funds penalty-free. You still will need to pay any taxes and fees associated with liquidating securities or withdrawing these assets, however. And it’s worth keeping in mind that using retirement funds early can also be a negative for your financial future, so don’t take this decision lightly.
As we’ve already covered, one financial benefit from a divorce is that you can access money from your spouse’s social security payments without penalty or cost to them. Another special benefit is that FAFSA forms only require information from the custodial parent of the child. If the other spouse has a high income, that can benefit how much financial aid your children receive for college or post-collegiate education. However, you must still include any alimony or child support income on the FAFSA form if you are the custodial parent.
It is understandable that you probably want to get divorced as quickly as possible in many circumstances. It is not generally a pleasant experience. But, rushing through your divorce can be a big financial mistake.
When you rush, you may not properly organize your financial condition or you may not take steps that maximize the financial benefits or payments you may be entitled to. And your spouse may get much more than their true fair share. So, take your time and get it right.
Attorneys and courts can be very costly. Even in a contentious divorce, you may be able to save a lot of money through alternative dispute resolution services like mediation or arbitration. Such decisions can be binding if you do not pursue legal action, but can save you quite a bit of time and money by avoiding legal proceedings in court.
There are other benefits to mediation and arbitration as well. First, it will likely allow you to have more control over the outcome of any disputes that going to divorce court. Second, when you go to court, filings will be made public. If you value your and your family’s privacy, alternative dispute resolution can help keep your business out of the public eye. Finally, you can still hire and use your own attorney for these processes and get the benefit of legal counsel without going to court.
Divorce can be overwhelming, especially financially. Don’t be afraid to ask for help. There are lots of professionals out there who can help you properly value your assets and debts, give you advice on big decisions, and even help you find money that your spouse might be hiding.
Professionals available to help you include lawyers, financial planners, divorce coaches, and even forensic accountants who specialize in finding hidden assets your spouse may be hiding overseas or by gifting to their family.
On the other hand, sometimes you won’t need these services and with every expert you hire, you do need to take account of how that affects your overall financial picture. For that reason, some people choose to essentially “do-it-yourself” and file for divorce by themselves or enlist the help of a relatively inexpensive service to help you file for divorce online.
Are you getting divorced but have no money? It’s time to start your financial life over. Learn how to do it here.
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