Divorce can be one of the most emotionally and financially challenging events in a person’s life. As overwhelming as it may feel, taking control of your financial situation before and during the process can help ensure that you emerge stronger and more secure. There are several key steps to understand and secure your assets which will help to set you up for a financially stable future.
Understand Your Financial Landscape
Before diving into the logistics of a divorce, it’s essential to take a step back and assess your full financial picture. Understanding your financial situation is the foundation for making informed decisions. Begin by gathering information on all your financial accounts, including checking, savings, retirement funds, and investments. Make sure you have access to statements and documentation that clearly outline account balances and ownership. These documents will be necessary for dividing marital assets and determining your future financial needs. Don’t overlook liabilities such as mortgages, car loans, credit cards, and any other debts. Understanding the full scope of your assets and liabilities will provide clarity as you move forward. If you haven’t been the primary manager of your household’s finances, this can be a daunting process. Don’t hesitate to consult a financial advisor or an attorney who specializes in divorce to help you gain a clear picture of your financial standing.
Know Your Rights and Entitlements
Divorce laws vary by state, and understanding what you are legally entitled to can help protect your financial future. In many cases, assets acquired during the marriage are considered marital property and may be subject to equitable distribution. This includes everything from real estate to retirement accounts. However, assets owned prior to the marriage or those acquired through inheritance may be considered separate property.
Consulting with a family law attorney early on can give you the legal knowledge to navigate these distinctions. Being aware of your rights can prevent you from making uninformed concessions during negotiations.
Separate Finances Early
One of the most effective ways to protect your finances is to begin separating your accounts as soon as you recognize divorce is a possibility. Move your direct deposit paycheck to an individual bank account and establish a credit card in your name. It’s essential to notify your spouse about this change to avoid accusations of hidden assets later on. Consult with your attorney before making any significant financial changes, as some states have restrictions on changing financial arrangements once a divorce petition is filed.
Prepare for Lifestyle Changes
One of the most challenging aspects of divorce is adapting to the lifestyle changes that come with it. The reality is, your financial situation is likely to change significantly. Be prepared to adjust your standard of living, at least temporarily. This is especially true if one spouse has been the primary earner in the household.
Create a post-divorce budget that reflects your new reality. This means accounting for potential spousal or child support, but also considering how your own income and expenses will change. Being proactive about these adjustments can help you avoid financial strain later on.
Protect Your Credit
While it’s easy to focus on dividing assets, it’s equally important to protect your credit. Joint accounts or co-signed loans may leave you vulnerable if your spouse stops making payments, potentially damaging your credit score in the process.
One of the first steps you can take is to close or separate any joint credit accounts. Make sure that any debts assigned to your spouse as part of the divorce settlement are legally transferred to their name to avoid lingering liabilities. Monitoring your credit report throughout the process can help you spot any potential issues before they become serious problems.
Create a Team
Legal counsel is essential, whether you are using a mediator or a family law attorney. Enroll your financial advisor and your tax accountant and form a team where you are all communicating and preparing together. Each member of the team should contribute to the discussion as you engage in the division of assets and discuss options for financial settlements. You should evaluate your options with the assistance of the team and a long term forecast showing how the different choices will impact your future. Your ability to make informed decisions will allow you to negotiate from a place of strength and knowledge.
All Assets are Not Created Equal
In a settlement, receiving $200,000 from a joint account is not the same as receiving $200,000 from a traditional retirement account because the retirement account should be discounted by the amount of taxes that will have to be paid when it is distributed. Similarly, when quantifying the value of a house, you need to take into account the embedded capital gain, as well as any expenses that can be foreseen, such as a new roof or an updated HVAC system. As you list your assets, add line items for the expenses, taxes or liabilities that go with each asset. Add non-financial assets, such as the pension your spouse will get in the future from military service, or health insurance benefits they will receive in retirement, if applicable.
Plan for Long-Term Financial Health
As you work through the logistics of dividing assets, keep your long-term financial health in mind. It can be tempting to focus on immediate concerns like keeping the house or obtaining spousal support. However, it’s essential to think about how your financial decisions today will impact your future. Can you actually afford the house you are fighting so hard to retain? If you have retirement accounts, ensure that they are divided equitably according to the law and that you have access to the appropriate portion. Remember, you will likely need a Qualified Domestic Relations Order (QDRO) to divide retirement assets without tax penalties.
Additionally, consider how health insurance and other benefits may change post-divorce. If you were covered under your spouse’s health insurance, you may need to explore alternative options, such as COBRA or marketplace insurance.
Seek Emotional and Financial Support
Divorce is a highly emotional experience, and trying to navigate the financial aspects while coping with the emotional strain can feel overwhelming. Seek support from trusted friends, family, or a professional counselor. Surrounding yourself with a support system can help you make clearer decisions when it comes to financial negotiations.
At the same time, working with a financial planner or advisor can provide the financial expertise you need to ensure you’re making sound decisions that align with your long-term goals.
Update Your Estate Plan
Once your divorce is finalized, updating your estate plan is crucial. You’ll need to revise your will, powers of attorney, health care proxy, and beneficiary designations on accounts such as life insurance and retirement plans. Overlooking this step could result in unintended consequences down the line, such as your ex-spouse receiving assets you intended to leave to someone else.
Work with an estate planning attorney to ensure your estate plan reflects your new circumstances and your financial goals.
Taking Charge of Your Financial Future
By taking these steps, you can protect your financial well-being during a divorce and ensure that you’re set up for success as you transition into the next phase of your life. Knowledge is power, especially when it comes to your financial wellbeing. Understanding your rights, taking inventory of your assets, and seeking support will empower you to make informed decisions and come through the divorce process with confidence and clarity. The road ahead may be challenging, but with careful planning, you can take control of your financial future and move forward on solid ground.
