Divorce results in two households where there previously was only one. And as a result, it almost always includes a negative impact on a family’s finances.
For families that were not considered lower-income before a divorce, the income drop after divorce can be as much as 50%, research shows, and about one in five women drop into poverty as a result of divorce. For those who get divorced after age 50, they experience an average decline in wealth of 50%, according to another study.
But divorce doesn’t have to lead to financial ruin. If you’re facing a divorce, there are several steps you can take to help protect your assets and build a new financial identity.
Assess Your Financial Situation
It’s impossible to protect your assets if you don’t have a clear picture of what you have and what you owe. Make copies of bank statements and investment statements in order to figure out an estimate of your net worth. Also, track down credit card statements and loan statements to determine exactly how much debt you and your spouse have.
If you can access financial statements from right before your marriage, get copies of them. These can be helpful in showing exactly what assets you brought into the marriage.
Open Accounts in Your Name Only
Many married couples have all their money combined in joint bank accounts. If that’s the case, it’s a good idea to start building an account (or more than one) of your own. Start by taking some of the money (usually half) out of your joint account, and depositing it into a new account with your name only.
Avoid any temptation to take more than your share of money from a joint account. If automated bill payments are scheduled to come out of the account and you’ve drained it, for instance, you and your spouse will then be liable for overdraft fees and late payment fees. Instead, be sure to leave enough money in your joint account to cover any upcoming bills and to provide your spouse with his or her rightful portion of the account.
Close Joint Accounts
Take steps to close any accounts held jointly with your spouse as soon as possible. This includes checking and savings accounts, as well as credit card accounts.
If you can’t close a credit account because of an unpaid balance, write to the creditor to let them know you're divorcing and you'll be responsible only for the current unpaid balance, in case your spouse adds more charges to the account. Talk to the creditor to find out if you can turn off purchasing privileges for joint credit accounts that will remain open until paid off.
Carefully Consider Retirement Accounts
Decisions about how retirement accounts will be divvied up between you and your spouse may have to be made in mediation or court. But it’s a good idea to understand the options so you’ll know what to ask for.
If you or your spouse have a pension plan, 401(k) plan or other retirement plan that will be divided in your divorce proceedings, you’ll need a QDRO (Qualified Domestic Relations Order), the legal document that divides such retirement plans. Your QDRO should include a specific date that the plan will be divided, and specify whether the division includes gains or losses since that date. It’s wise to get help with this document from your attorney or financial advisor.
A traditional IRA or 401(k) will incur taxes when you cash it out, so make sure to take those taxes into account when determining how to divide retirement assets. For instance, if you’re in the 25 percent tax bracket and you get a 401(k) worth $100,000, it will actually be worth only $75,000 when you try to use the funds.
If you or your spouse have Roth IRAs or 401(k) plans, the assets in those plans will be worth the full amount because taxes are paid on those funds before they are deposited into the accounts. If one spouse gets a traditional IRA worth $100,000 and the other spouse gets a Roth IRA worth $100,000, the person with the Roth has gotten the better end of the deal, because he or she will owe zero taxes upon withdrawal.
Rebuild Your Financial Identity
After a divorce, most people need to consciously work to establish a positive new financial identity. Your assets have likely been tied up with your former spouse’s assets for multiple years, and you may have spent considerable funds throughout the divorce process.
To start rebuilding your financial identity, request a copy of your personal credit report. You’re entitled to a free credit report every year from each of the three credit reporting agencies, and you can access it at AnnualCreditReport.com. When you have the report in hand, take the time to review all accounts that are in your name and correct any errors.
Sometimes married couples put assets and debt in only one spouse’s name, meaning the other spouse may have little or no credit history. If you need to build credit in your own name, consider opening a new credit card with a low limit. If you make one recurring monthly purchase with the card and pay off the balance each month, you’ll soon build a positive credit history without getting yourself into unnecessary debt.
When you’re transitioning from a two-adult household to a one-adult household, it can be more important than ever to avoid unnecessary debt. Figure out exactly how much income you can count on each month and create a budget based on your new financial realities. Be sure to include savings as part of your regular monthly plan to help you prepare for future financial goals, and commit to sticking to that budget.
As you move forward in your new life of singlehood, be sure to change the beneficiary on your retirement plan, life insurance, and any other financial accounts that may list your former spouse as beneficiary. This is an often-overlooked step that can cause future heartache.
Going through a divorce can be a difficult process, but it doesn’t have to derail your financial life. Give yourself the gift of careful financial decision-making before, during, and after your divorce, and you’ll thank yourself later.