Post Divorce Finances: 7 Steps to Rebuilding Your Financial House

by Nora Dunn on 27 October 2008 5 comments
Photo: Nora Dunn

My, how life changes when you close one chapter of your life and open a new one. Severing a conjoined life and combined finances as a result of divorce is painful through and through. The jump to a single income lifestyle paves the way to feeling the cash crunch, and if children are involved it is even more pronounced. Even if the breakup is liberating, there is still some mopping up to do after the storm.

Here are seven things you can do to set your new life up on the right foot:

 

Joint Banking Be Gone

Close all joint bank accounts, joint non-registered investment accounts, and credit cards. Not only is this a tangible form of evidence to demonstrate a date of separation (in locales where you need to be separated for a time prior to applying for divorce), but it also protects each party from destructive actions the other may take in anger or apathy.

 

Remove all Beneficiary Designations

Here is a list of items you may need to look at in terms of removing joint or beneficiary designations:

  • life insurance policies
  • retirement funds
  • auto insurance
  • credit card insurance
  • pension funds through work
  • health care plans through work

If you are required to designate a new beneficiary and are not sure who to choose just yet, simply choose your estate for now, or until you hear otherwise from your lawyer/accountant/financial planner. Although an estate designation may not be the most tax-efficient option, it will keep things simpler until all the divorce paperwork is properly nailed down and you get on your feet again.

 

Create a New Budget

Flying solo means creating a whole new budget – a crucial step of the process. You may or may not have been actively involved in the finances while married, so creating a new budget could be an exercise in learning how much things cost, or simply reallocating income streams accordingly.

 

Update Your Will

Updating a will doesn’t have to be a laborious process. If it is simply a matter of changing beneficiaries, a codicil (a one page addendum that attaches to the will) can suffice.

 

Review Your Estate Plan

Although you will have covered most of the bases with reassigning beneficiaries and updating your will, your estate plan may incorporate some larger issues or opportunities given the new financial structure of your life.

ARTICLE CONTINUES BELOW

For example, your previous estate plan may have been mindful of your ex-partner’s parents who are – or will become – financially or physically dependant. Or maybe children from a first marriage have been incorporated into the estate plan and now the structure of trusts or income streams needs to change.

 

Don’t Blow the Financial Settlement!

Just in case you had eyes for a new stereo system or a bigger house, you may want to seek counsel before spending any financial settlement that arises as a result of your divorce. From tax efficiency, to your overall financial plan, there could be ways to greatly help or detrimentally cripple your finances by virtue of what you do with the settlement.

If you are the one doling out the settlement, then refer to the following point to help you sort through the noise:

 

See a Financial Planner

Your financial planner will be instrumental in helping you with many of the above chores. Many financial planners can help with the transition and separation of accounts, but if you are uncomfortable meeting with the same planner you used as a couple, then ask around for a referral to a new planner who you can trust and establish a new relationship with.

You face lifestyle changes (in some cases drastic ones), income differentials, emotional transitions, tax plan modifications, and investment time frame readjustments. Your asset allocation plan may change, either because your investment personality is different from your ex-partner’s, or because you plan to utilize your investments differently (ie: your time horizon is longer, or you need to draw down on some investments now).

 

As crushing and stressful the trauma of severing your life from a loved one can be, you must try to maintain a level head throughout the process. By covering off the bases above, and keeping your eyes on the road ahead, you can survive the ordeal and move forward without falling into so many of the traps that lurk along the way. Life will go on, and in some cases, may even improve.

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Guest's picture
Jen Shikami

Great summary. Don't forget taxes for the year! Whatever you plan, I advise making it part of the separation agreement and later, legally incorporated into the divorce decree. Include deadlines and penalties if the ex is supposedly going to pay you his/her half of tax money owed...

Personally, I wish I had chosen to file as "married filing separately" so we would each pay our own amount. It would cost more, but having to negotiate out one person paying the other back if filing jointly can be troublesome otherwise.

Also, be sure you take copies of all previous joint tax returns with you. You may not be able to get them from your ex later.

Guest's picture
claire7676

REMEMBER...the IRS only cares how you will file as of the end of the year. So if you know you will file married filing separately, go ahead & update your W-4 form for federal & state ASAP! This was the one thing I forgot about & ended up owing so much I had to get a loan from a family member.

Guest's picture
katy

Just revisited this topic. In addition to closing all joint accounts, I would go one step further: clean them out. Yes, the checks will bounce either way but he/she will get the money before you do. happened to me in lst marriage.

Before you ask for a divorce, try to line up your shots, (make your plans). Do you have a reliable income, steady job? Savings? Emergency fund? A place to live? Money to rent/pay security fees? A relative/friend you can stay with or can help you financially? What financial assets do you have that you can tap?

I hope it doesn't come to that, but try, as best as you're able, to prepare - if possible.

Best wishes to you.

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Guest

unfortunately i was in this situation and i trusted my now ex spouse. i asked him to close the joint bank account. he lied and said he did. i believed him and never checked. years later i found an old checkbook and called to find it was still open. i closed it immediately and within the 24 hours it took to actually close he charged up the credit line that was attached to it. i never thought he would do that but years later i started getting declined for credit cards and apartments when i was apartment hunting. i got a hold of my credit report and found out he had stolen what now amounts to thousands (after the years of interest) and i am liable for it all.
my advice - divorce can be very ugly!!! do not trust that the other person will "do the right thing". they might be acting out of anger or self righteousness and will not have your best interest at heart any longer.
In the end, I lost about 65K to my x - as he stole all my material items (including my car, my video equipment, furniture, pets, antiques and more) and racked up the lawyer's bills (he was getting his pro bono) and committed fraud on the bank account. the person you might know in a marriage becomes a very different animal in divorce.
but in the end, even though i had to couch surf and eat rice for months, leaving was the best thing i ever did. my advice is to have your ducks in a row, watch your back and do not trust the person you used to love (and i was with my x for almost 20 years) - people change under stress.

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Guest

Assets? Investments? 401k? A will? Since when is there any of that LEFT to divide? If you have any of those left post-divorce, you are beyond lucky. My ex-husband quit working a couple of years before I left and by refusing to work, demanded I support the household on my income alone until I was completely broke, then, knowing I couldn't afford a lawyer, took virtually everything of value and left me with all the mutual debt simply by refusing to sign the papers unless the terms were his way. Close joint accounts? Do it way before you separate, or at the very least, open your own individual accounts for everything possible and request to have your name removed from former joint accounts wherever possible. Don't take the word of your soon-to-be-ex; oversee all financial matters yourself and keep checking your credit reports every few months to make sure any creditors are not trashing you for your ex's debt (they WILL do that). No way to be too well-protected or prepare too far in advance. If you change employment or get a raise, ask for it to be direct-deposited separately into your new individual bank account. Not suggesting you hide assets or do anything illegal, just make sure your spouse can not access it before the case goes to court, and you have something saved up for your needs. Go apartment hunting, or job-hunting if you were a home maker. Take job skill classes NOW, on the net if necessary. You will need them, need every possible way to be more marketable to get by as a single-income household. Learn to sell on ebay and keep the income separate, I bought inventory wholesale that I already dealt with in business and retailed it on ebay for a significant portion of my income. Ebay saved my a$$ until I was able to relocate and re-train and stabilize my life a little bit. Don't be ashamed to furnish your new space with finds from Goodwill, friends, craigslist and freecycle.com. You can always give your friends their stuff back when your life stabilizes, so don't be ashamed to borrow that bed or microwave. The savings might be really important. If you have any suspicion of getting saddled with a tax debt, contact the IRS before you separate, and if possible convince your spouse to contribute equally to paying off any old joint returns. Establish a history of her making payments on it, so the IRS would have reason to enforce collection equally on both of you and not just you alone. As soon as you have worked out a theoretical budget on how much your new post-divorce life will cost, ransack the internet and the IRS web site for info on how to prepare a strategy to request an abatement of penalties and interest that you can enact as soon as the divorce is finalized and you are in reduced circumstances. My ex didn't pay taxes the first 2 years post-divorce, and when the IRS caught up with him, he started paying off the most recent bill first, leaving me stuck with the higher joint return. Needless to say, I have not received any of my tax refunds since the divorce - they are all applied to that old joint return, and although I have paid the amount of the original tax bill, the IRS refuses to sever liability, and keeps raising the total every year so it's as if I never paid anything. The first year post-divorce my income was $9000 (I lost my business the same year as the divorce and had to switch careers), yet the IRS gladly took the tax refund I worked for and applied it to my ex-husband's responsibility. Nor will the IRS give you the time of day unless you are represented by a lawyer; another reason to take care of IRS issues before going down to one income. No matter how much faith you have in human decency and common courtesy, and no matter how well you think you know your spouse, don't underestimate how far they will go to get everything and leave you nothing. You will be surprised to find how much the person can cost you by simply resisting, delaying and refusing to cooperate. My ex for example evades paying child support by remaining under-employed and frequently changing jobs, so I get to support my son AND have the privelege of paying 100% of the costs of delivering him for court-ordered visitation 150 miles away. I could get it legally changed if I could save enough of the transportation costs to afford a lawyer, or afford enough time off work to pester the Child Support Division to make the guy pay up. BTW you can't depend on state agencies to do their jobs either without constant pressure from you, so investigate now what you will need to know about child support enforcement and (in our case) getting kids health insurance from the state. Post-divorce you will likely have to work every waking hour to make ends meet and there will be no time to look into these things and follow up. You want out of the marriage and will give in order to get, then a surprising few months later you might find yourself having to choose between gas to get to work or groceries to make dinner for your little one when you get home, things you never thought in your life would ever come up, and at the same time be amazed that it's possible to be so busy all the time when you have to do everything yourself, and yet still know that getting out of a terminal relationship leaves you better off.