How to Manage Finances During and After a Divorce

Key takeaways:

• As soon as you and your spouse decide to end your marriage, gather information on your joint finances and establish your own bank and credit accounts.
• If you are unable to agree on how to divide your assets, a court may do so based on whether you are in a community property or equitable distribution state.
• After your divorce is settled, turn your attention to your financial future, including your retirement and other savings goals.

Understanding the financial impact of divorce

Everyone enters a marriage with lifelong expectations, yet roughly four in 10 marriages end in divorce. Going through a divorce can be a difficult process, no matter how amicable the breakup. And one of the bigger challenges can be how to wisely manage your finances during this time and afterward.

Understanding how to prepare financially for divorce can help you navigate the process and work toward rebuilding your financial stability. Managing your finances after divorce and getting back on track with your financial goals will depend on your individual circumstances and the terms of your divorce settlement.

As you sort out your finances during and after a divorce, keep these potential steps in mind.

Divorce financial checklist

To better manage your finances during divorce, prioritize these two important steps as soon as you and your spouse decide to end your marriage.

1. Open new bank accounts and credit cards

As a married couple, you most likely had joint bank and credit accounts. During a divorce, one of the first things you should do is open an individual checking account and consider adding a savings account. You should also consider getting a credit card in your name if you don’t already have one.

Use the new bank accounts for all your personal deposits and expenses going forward, as the joint accounts will eventually be split between the spouses. This might include redirecting any direct deposits and updating automatic payment information.

Making a clean separation of your finances early can help reduce complications when it’s time to formally divide your assets. It is also a good way to keep your credit score healthy, as a spiteful ex-partner can potentially damage your credit score with overzealous spending.

2. Collect all pertinent financial records

To have a clear and accurate accounting of your full financial picture as you head into divorce proceedings, gather recent statements and all documents that relate in any way to you or your spouse’s money. Those may include records for:

• All joint checking and savings accounts
• Credit cards and mortgages
• Other debts, including student loans
• Household bills
• Investment and retirement accounts
• All income streams
• Pensions
• Insurance policies, including life, health and home

This information will help you determine exactly how much money is coming in and going out each month. Armed with this data, you and your spouse can get a picture of your current standard of living and calculate how much money each of you may need to maintain it.

3. Start the necessary legal process to separate your finances

Breaking up a marriage—and dividing the assets acquired during it—can be complicated, and legal considerations often come into play.

4. Check on a prenup

Whether you signed a prenuptial agreement before getting hitched can play a major role in the divorce. If you executed a properly drafted prenup, this agreement might override state law and determine how marital assets are distributed—possibly with you keeping all of yours and your spouse keeping all of theirs.

5. Look into mediation first

Not all divorces require a court proceeding. It could be in your best interest to try mediation. Mediated divorces are typically faster, more peaceful and considerably less expensive. This route can alleviate the financial burden of retaining a lawyer and paying court costs—an important consideration as you start rebuilding your finances following the divorce.

6. Lawyer up, if needed

If you and your spouse are unable to agree on how to resolve financial matters, a court will provide a legally binding decision on the division of assets. If your divorce is heading to court, you should seek legal advice from an attorney experienced in family law.

Based on court arguments and records of assets and debts, the judge will issue a divorce decree, a legally binding document that details asset distribution and, if applicable, any spousal or child maintenance payments. If there are no spousal maintenance payments, this severs all financial ties between the spouses.

7. Understand property distribution rules in your state

How a court orders the distribution of assets varies by state based on these two legal structures:

• Equitable distribution states. Most states operate under equitable distribution laws, meaning assets are divided between the spouses in a fair manner. That does not always mean a clean 50-50 split. The judge will consider a range of factors when determining what constitutes an equitable division, including:
  • Marriage length
  • Each spouse’s health and age
  • Each spouse’s income and earning capacity
  • Standard of living maintained during the marriage
  • Value of property and other assets
  • Debts and liabilities
  • In an equitable distribution state, one spouse may be ordered to turn over more property or assets for long-term spousal maintenance.
• Community property states. Nine states have community property laws—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
  • In these jurisdictions, the court will classify all property owned by the couple as either separate spousal property or community property. Any property purchased or acquired during the marriage is considered community property. Separate property would have been acquired before marriage or after the separation.
  • In a divorce, community property is divided equally, and separate property, which may include land, retirement funds or an inheritance, remains with the spouse who acquired it, though exceptions may apply.

8. Consider your children’s finances

A divorce can become much more complicated if you and your spouse have children together. The process can still move forward amicably, provided both parents come to an agreement on how to share custody and financially support them until the age of majority, typically 18 or 21.

Child maintenance support should cover the costs of everything from groceries, housing and clothing to education, entertainment or extracurricular activities. Also consider health care costs and coverage.

If you and your spouse are unable to reach an agreement on shared custody and financial support, you will need to obtain a court order for child maintenance awards and custody arrangements.

Start planning your post-divorce financial future

Financial recovery after divorce may involve learning to handle unfamiliar tasks, especially if your former spouse had sole responsibility for paying the household bills, coming up with a budget or investing for long-term goals. A top priority at the outset should also be setting aside emergency savings to cover three to six months of expenses. Then consider these steps:

Reassess your budget

Keep in mind that you may need a higher income to support the same standard of living. However, both men and women come away from a divorce with lower family incomes, research finds, with women experiencing 46% to 50% drops in income—nearly double the declines experienced by men.

Review your retirement portfolio

During the divorce, you and your spouse may have divided your retirement plans and potential pension benefits (the details of that division may hinge on whether you live in a community property state).

If you will be getting a payout from your ex-spouse’s workplace retirement plan or pension, you may be required to get a Qualified Domestic Relations Order (QDRO) that has been approved by the court and by the retirement plan administrator. IRAs can typically be divided based on the terms you’ve agreed upon. Once retirement assets are divided, the next step is to review your portfolio and current savings.

Also, keep in mind that once you are ready to claim Social Security benefits, you will have the option of claiming based on your ex-spouse’s earnings record as long as you were married for at least 10 years.

Check on benefits and insurance

Consult with your employer’s human resources department for guidance on any steps you need to take with your benefits, 401(k) or pension plan, including updating beneficiaries.

You should also update any life insurance policies you have to ensure you are listing the proper beneficiary, possibly replacing your spouse with a child or another loved one.

Rework your estate plan

If you do not already have an estate plan in place, this is a good time to work with an estate planning attorney or service to draft one.

Your estate plan covers how you want to disburse all your assets, whether through a will or a trust. It will also generally include advance directives for health care and powers of attorney for finances. Without a spouse to make decisions in the event you lose mental capacity due to an injury, disease or accident, you will need someone else for this role.

If you already have an estate plan in place, a divorce typically necessitates updating it. In estate plans for most married couples, each spouse usually acts as the other’s executor, and chances are, if you are divorcing your spouse, you want to remove them from your estate plan.

The bottom line on financial planning for divorce

Going through a divorce and rebuilding your finances afterward can be challenging, but by planning carefully and seeking advice when needed, you can get back on track financially.