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All marriages end eventually. That may sound like doom and gloom, but it’s a fact. They either end in divorce or death. What is important is that you are prepared for this inevitability.
One of the greatest problems of a couple divorcing is money. The division of it or the lack of it, and its role in the future of the individuals.
How to Solve Financial Issues and Make the Right Decisions Without Having a Guide to Divorce Finances
Mistakes with your finances during this time can be quite expensive and stressful.
Therefore, let’s stay clear from making any poor financial decisions. Let’s learn what mistakes to avoid and how to make the right financial decisions during the divorce process to protect your wealth and assets.
Some of the Most Important Aspects of Divorce Finances:
How much is a divorce
How to avoid alimony/spousal support
How to handle a case of homeowner divorce
How divorce could affect your retirement
Child custody and support
Division of financial assets (cash and investments)
Marital property laws like division of community property
A divorce will always affect your life, and that includes your finances. After it’s all over, you might need to adapt your life according to the divorce finances you ended up with. Things like paying child support and alimony. If you want a happy post-divorce life, then you need to handle these aspects of your finances properly from the beginning.
You will lose some assets and you will have to cover the bills all by yourself. Making the right financial decisions from now on is going to put you to the test.
Assets and liabilities (what you own, what you owe) must be taken into account. The tendency is to think of the equal division of assets, but people forget about the marital debts: mortgages, credit cards, loans, etc.
Then there is the matter of joint financial holdings or joint debts, like a joint bank account or shared credit card.
Most divorce laws are based on the 50/50 split rule (community property or referred to sometimes as marital property), but not always. For example, if a man is a big earner, and his wife stays at home to raise the kids, but he has given her a credit card to use for the children’s expenses, who is responsible for that debt? It isn’t always cut and dried. Liabilities can depend upon who owns each one or who can afford to pay the debt. And some liabilities can survive your divorce settlement; many do.
From a financial point of view, the best way to avoid conflicts may be to sell the family home, so that each party can move to live on their own. And, you may get a substantial influx of money to invest in a new home, your own ventures, drop in your bank account, or settle your liabilities so you’re starting your new life debt-free.
Furthermore, don’t forget that selling a home will have tax implications. Therefore, it’s a good idea to consult with a proper real estate agent or accountant. If you want to make the process faster, you can always look for a cash buyer.
You can take advantage of opportunities such as joint savings accounts that can be divided, which will grant you even more money to move on. Nonetheless, always consult on matters such as this with a divorce financial advisor and/or your divorce attorney.
Remember that your divorce lawyer can also explain how child custody might affect your divorce finances. It’s better to get legal advice on every aspect beforehand, to handle the process correctly.
Don't Let Your Brother-in-Law Give You the Advice of a Financial Planner
One piece of financial advice we can offer: don’t mess with the divorce laws in your jurisdiction, and make sure you comply 100% with the terms in your divorce agreement, especially in the area of finances. Don’t even think about hiding money from your spouse. If you’ve hidden financial transactions during your marriage, now is the time to come clean.
The division of community property varies, but it is essential that you stick with local laws and be honest. If you attempt to hide assets, and it is revealed that you did, you can end up back at square one. Be smart and be upfront. Financial institutions, credit card statements, and credit reports leave a paper trail.
Income, Retirement, and Taxes
Even if you normally prepare your annual tax return yourself, the year in which you get divorced is going to be different, and very likely beyond your skills to calculate. This is the time to hire a professional tax accountant. A divorce financial analyst may be able to help as well.
You may be able to go back to filing yourself in the future, but let an expert file your individual tax returns this time. They may need to be connected with your divorce lawyer to get the facts for filing and there will probably be some retirement account issues to resolve with the tax authorities.
You may have been filing joint tax returns, or at the very least, declaring yourself to be married on your tax return, but it is all different once a divorce is final. Don’t risk an audit; get a pro to handle your taxes for this life event because even missing one retirement asset could land you a letter from the IRS in three years which your ex may not be so willing to split.
Costs of Life Insurance or a Personal Finance Must Have
Life insurance is a misnomer; it’s actually death insurance.
Your life insurance is all about who the beneficiary is because it is that person, or your estate, that will inherit the proceeds of your life insurance policy upon your death.
Ask your lawyer before you buy life insurance if you should name your estate or an individual as your beneficiary; each has different implications upon your death, and what your financial status is at the time of your death.
And there is a difference between whole life and term insurance; term insurance pays out only upon death and is for a fixed term of coverage. Most likely 10 or 20 years, until your kids turn 18 and leave the house. Besides whole life insurance, which can accumulate money as an asset that you could borrow against later, there is also Universal Life which can be funded somewhat like a retirement account. Find out which is best for you and your circumstances by talking with a licensed life insurance agent.
In most marriages, life insurance exists in one of a few states:
• nobody has any (big mistake; you have at least a partner to take care of, possibly children, too, who depend upon you)
• only one partner has life insurance
• both partners have life insurance
It is easiest at the time of divorce when both are life-insured; each person takes their personal policy with them. They may need to change the beneficiary, but each policy belongs to the individual. This is why we stated at the beginning of this article how important your financial planning after divorce really is.
If there is no life insurance, it is easy because there is nothing to divide, but it is also not a responsible way to manage your estate.
If one partner has life insurance, but the other does not, this may be the time for the uninsured party to obtain life insurance. It is better to get it when you are young, but better late than never.
Who Gets the House in a Divorce?
It depends. Real property is subject to a litany of laws, some of which include:
- the name on the title deed
- who bought the house
- who made the down payment and,
- who pays the mortgage
- who will remain living in the house, if anyone
- will this be the home where the kids will continue to live
- the standard 50/50 assets division laws
Property settlement agreements can be structured by a lawyer in order to be fair. It may be that the house is too large for one party or no longer needed, in which case it may be sold and the proceeds divided between the couple. It may have increased in value sufficient that what is left after the mortgage is paid off in a sale enables each person to purchase their own home.
In most marriages, marital property is the main asset, and so many factors go into its worth and its ability to be divided. This is a matter best left to your lawyer along with a certified real estate appraiser, but be sure that they are clear as to what both of you prefer.
Stay on Track with a Post Divorce Budget So Your Credit Score Doesn't Suffer
If you had the habit of splitting the bills with your ex-spouse, it will be challenging to start paying it all by yourself with less household income now. Therefore, you need to come up with a new financial plan and budget, to reduce your costs and secure your stability.
According to statistics, 63% of Americans live paycheck to paycheck; virtually all Americans are drowning in debt because their monthly expenses outweigh their household income. Just imagine if you have kids, now you have the financial burden of child-related expenses in two households instead of one joint property.
To budget properly, we recommend you to do the following:
Establish your monthly costs
Get rid of unnecessary expenses
Look for a better job to increase your income; you may upgrade your skills first
Make sure to leave some money to save
Have a yard sale and get rid of the junk you don’t need anymore
Create an emergency fund in case your income ends unexpectedly
Make the decision to downsize and buy a smaller house or condo
Move-in with family, even temporarily, until you’re back on your feet
Find a friend in the same boat and share a place
Accept that suffering now is a step toward a better future and strive for improvement
It’s even more important if you have gone through a difficult contested divorce, which is likely to have cost you over $20,000. The cost of divorce likely took a hit on you, but regardless, you still need to plan carefully.
In addition, consider that you might no longer have access to a specific asset or financing options like borrowing a home equity loan against your house. You also need to plan more carefully because you no longer have someone to split expenses with.
Furthermore, it might be a good idea to look into a financial planner or even consult a divorce financial advisor to make the transition even smoother.
Uncomfortable with Money Matters? Then Don't Give Yourself Financial Advice!
It is really important that you check in with a certified financial advisor. They usually get paid a percentage of whatever investment you may make, and many banks offer this service for free if you are a good, long-term customer.
There are dozens of free online money management courses. Take one; aim for one that educates you about divorced individuals or single parents (if you have kids) and money. It’s an investment in the new you. If you control your financial picture, you control your life.
Talk to your trusted friends and family, and share this article. You can exchange ideas and knowledge, help each other adjust, and plan for a safe financial future. There are many certified divorce financial analysts right here for you, too.
Need to know more about money? To access support for what you are going through? Help others with their journey? Then join us here at the Divorce Mistakes Network.
Mistakes can be very costly in terms of money. We can help you avoid them and live your best-divorced life.
Frequently Asked Questions about Divorce Finances
When facing a divorce, it’s normal to have hundreds of questions racing in your mind. Therefore, we have written them down to answer them in a quick and accurate manner.
How are finances split in a divorce?
To avoid negative implications later during the process, we recommend you take the following steps to split finances:
Get all the financial documents
Create a new budget based on your actual situation because you cannot split expenses as a couple any longer
Divide accrued items in a fair manner
Close your joint accounts
Cancel shared credit cards
File for legal separation
Divide every asset that you own
Write down everything to make it legit
However, we recommend you seek legal advice because not everyone is in the same situation. A proper divorce attorney can help you to make the best decisions when it comes to dividing an asset, handling accounts, dividing community property, etc.
Will divorce ruin me financially?
It depends on the steps you take and how you handle the process. Nonetheless, the lifestyle of women tends to decrease by 27% after divorce, whereas the husband might improve his lifestyle by 10%. All of these stats are relative because it depends on how you handle the divorce proceedings.
With a proper settlement agreement, you don’t have to get ruined financially. You can have a happy and abundant life with an excellent financial situation.
It’s important to settle all the debt and to cancel all the joint accounts, to prevent damages to your credit score. If your marriage has ended, sharing your income and expenses through your joint bank account has to end as well.
Is the husband liable for the wife’s credit card debt?
According to divorce laws, debts incurred by you or your spouse might be labeled as community debts in most places, and hence, you will be considered liable for your wife’s expenses she may have charged to credit card debt. It might even affect your credit score. Therefore, it’s important to discuss this before the divorce process to iron it out.
Can I hide money before divorce?
While doable, it is considered a very bad decision. If you commit this practice, the court might impose a large monetary penalty on you, which will not help your divorce finances. It’s better to be clear with everything and make arrangements with your ex-spouse before beginning the process or making any decisions on your own without their consultation.
Can my wife take everything in a divorce?
Your wife can’t take everything in a divorce. She can only take her fair share, for example, an asset or certain properties. Also, it’s important to remember that her share of community property must-have, most likely, been obtained during marriage to be valid. Most people are fearful of losing any of their retirement to their ex-spouse.
Are assets always split 50/50 in a divorce?
It depends on the state, but most of the time they are divided on a 50-50 basis. Every asset or real estate property that is considered as a marital asset will be divided among both parties, as long as they were obtained using the household income during the marriage.
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