Divorce can be a complex process, not only in terms of managing emotions but also in terms of managing finances. There are a number of important steps to be taken – from dividing up assets, to addressing the costs of the divorce itself, to re-thinking your day-to-day budget in preparation for the uncoupled life changes to come.
While untangling your finances in the wake of a divorce can certainly be a tricky situation, the process will be far smoother with a bit of forward thinking and planning. As you begin to make your considerations on moving forward with divorce, here are a few basics to keep in mind in terms of preparing for the financial side of the divorce.
Separating Your Credit
Many married couples are joint owners of credit, such as a credit card or loan, meaning that both parties legally share in the debt responsibility. As soon as possible, aim to wipe out remaining balances and close these credit accounts. Or, you can close the accounts now, without paying the balance, and wait to address the split of debt responsibility during further divorce proceedings. If you’ve previously only held joint credit accounts with your spouse, and don’t have any individual credit in your name, consider applying for a credit card now. It’s important to build up your own credit score for future loans or mortgages you may need.
Dealing With the House
Divorcing couples often face the same question – what to do about the house? The two most common financial routes are to sell the house and divide the proceeds; or, to have one spouse purchase the house from the other. The first option can be a bit more straightforward, but at the same time, a tough property market can lengthen this process. The latter option usually depends on one spouse being able to qualify for a new loan, in order to refinance the original loan and become sole owner of the home and solely responsible for its mortgage. A third option would be to continue on as co-owners of the home, although the complications of continually managing this arrangement mean it’s a road that’s rarely taken by most divorcing couples.
Agreeing on Investment Division
Depending on the length of your marriage, you and your spouse might have a number of investments in both your names. These could be taxable investment accounts with stocks and bonds, or they might be retirement accounts to which both spouses are entitled to make withdrawals after a certain date. It’s even possible you and your spouse might have an alternative investment such as a second home or works of art. When it comes to investments, especially accounts, it’s important to understand the ins and outs of tax obligation and withdrawal fees – to understand how both parties can preserve their investments as far as possible, while still agreeing on a fair division of funds.
Financial Planning for the Future
Even though you’re getting a divorce, it’s possible that you and your spouse will still need to be jointly involved in at least some financial planning for the future; particularly if you have children, or any jointly held debt. The best case situation is if both parties can work together to draw up a list of their children’s future financial needs – such as summer camp, college and known healthcare needs like braces – with a plan on how these costs will be funded. Some savings accounts are specifically designed to help prepare for college, such as the 529 plan account, so check in with your financial institution to see if there are any relevant solutions for your situation.
Budgeting for Divorce Costs
Finally, keep in mind that the divorce itself could cost in the tens of thousands of dollars, depending on what kind of proceeding you’re undergoing. This can come from attorney, court or mediation costs; the cost of moving into a new living arrangement; or the cost to re-purchase any big ticket white goods, furniture or other items that are no longer jointly owned. Remember – after a divorce, your standard of living is likely to change, and you’ll need to budget accordingly. A financial advisor can help you to better understand what costs you’ll need to plan and prepare for, and they can assist you in creating an appropriate budget.
