10 steps to a money-smart divorce
By Jay MacDonald • Bankrate.com
When your marriage breaks up, the last thing you feel like doing is crunching numbers. You're hurt, perhaps angry, and possibly overwhelmed with anxiety, fear and despair. You're focused on the past and present, not the future.
But as many divorced couples learn the hard way, this is precisely the time you need to get a grip and pay close attention to your assets and your financial future, lest both slip away in the flood of emotion.
"First and foremost, it's a business deal," says Gayle Rosenwald Smith, a Philadelphia family lawyer and author of "Divorce and Money: Everything You Need to Know." "That means you've got to get rid of your emotion any way you need to, whether through therapy or going to a gym. Because your divorce should be based on one thing: your property settlement. It's a matter of numbers, that's all it is."
Financial educator Ruth Hayden, author of "For Richer, Not Poorer: The Money Book for Couples," agrees, but admits that's easier said than done.
"At least 80 percent of money is about self-management, about emotions, and 20 percent is about quantifying and computing," she says. "The counting part is easy; it's the emotional part that's hard."
Since money is the number one cause of divorce, it's safe to assume that splitting the financial sheets won't be easy. Here are 10 steps to help you cast off, steady your financial ship and set sail for the solo voyage ahead.
1. Pull your credit report.
"Pull your credit report before the divorce so that anything in dispute can be resolved before the divorce is final," says Hayden. There are three major credit reporting agencies: Experian, TransUnion and Equifax. Be sure to get a copy of your report from each of them. The reports are the quickest and easiest way to get an overview of outstanding loan balances, mortgages and credit card debt that you and your spouse will eventually divvy up.
2. Open individual bank, credit card and brokerage accounts.
You also need to do this before the breakup is official. It will be easier to get a credit card and bank account in your own name while you are still married and share joint assets and debt on credit cards, mortgages and loans. Hayden says this is especially important for women who have never established credit in their own name. "It's easier for a 15-year-old to get a credit card than it is for a 50-year-old divorced woman. She just gets deleted," Hayden says.
3. Close all joint accounts.
A divorce can take time. To avoid acquiring additional joint debt (or suddenly losing shared bank assets) during the legal process, close your joint credit card and bank accounts. You will, however, still be jointly responsible for paying off the balance of the closed accounts. Cancel the accounts in writing and be sure to request that they report each account as "closed by customer" to the credit bureaus. Bankrate has form letters that can help you do this.
Closing shared accounts is a critical step and one that is too often overlooked, says Smith. The more you remain connected to your ex-spouse financially, the more you are at risk. If possible, pay off joint credit card balances by check from your individual bank accounts or through balance transfers to your individual credit card accounts.
"In a property-settlement agreement, couples often split their debt. One person takes the MasterCard and another the American Express. Well, that's an agreement between the two of you, not between you and the credit card company," says Smith. "What will happen is, one person declares bankruptcy down the road and the credit card companies come after the other. You might be better off each borrowing in your own name and each paying off the credit cards so that you come out of the marriage without any joint debt."
4. Keep separate property separate.
Assets you brought to the marriage separately (real estate, vehicles, an inheritance, gifts, money you acquired before marriage, etc.) are yours to take away from the marriage. You drive in with an SUV, you drive out with an SUV. But if you put any separate assets into a joint account, they may be considered joint property.
"If you're going to take separate money and give it to the marriage, then either decide to kiss it goodbye or do some loan documentation, because if you don't, you're going to lose it," says Smith.
Separate debt also travels with you. For example, if you brought a student loan into the marriage, you carry it out with you, even if your spouse was helping to pay it off.
5. Consider selling the house.
Traditionally, women tend to hold onto the family home at all cost. Unfortunately, it's often an emotional decision that makes poor financial sense.
"Studies say that women will keep the house and give up the retirement money," says Hayden. "It is one of the biggest mistakes women make. The problem with that is, many times she's not going to be able to afford to stay in this house anyway, and if they've been in the house for a long time, she could stand to lose a good share of her capital gains exclusion, which is $250,000 for singles and $500,000 for couples."
"I recommend that they look seriously at selling that house, even though it's hard. It's an emotional tie that ends up strangling the woman. She ends up losing it anyway, and she has given up her retirement money. I ask women to just think a little bigger."
Smith agrees: "Sell the house and take what you make and put it into something where you know that you're able to pay your expenses and have a cushion, especially in an economy where we have no clue what's going to happen."
6. Change those beneficiaries.
Despite what your divorce decrees, if you don't change the beneficiaries on your will, trusts, IRAs, pension plan and life insurance, your ex could wind up with an unexpected windfall in the event of your untimely demise. As long as you're at it, this is a good time to review your various policies to make sure they fit with your new circumstances. And don't forget to delete your ex-spouse from these documents and policies and change your marital status where applicable.
7. Reclaim your name.
For some women, divorce adds another task: reclaiming your name. If you are reverting to your maiden name, you may be required to produce the divorce decree or document signed by your ex-husband that acknowledges your new name in order to obtain a new driver's license, passport or other identification. Use your new name to announce your new marital status to your circle of contacts: your doctors, employer, human resources department, children's teachers, landlord, pharmacist, mail person, health insurer and clergy.
Don't forget to register your name change (and adjust your withholding if needed) on your W-4 and other tax forms and with the Social Security Administration. A mix-up could cause you to lose valuable Social Security credits for your work, and you may have to show proof of both names when applying for benefits.
8. Check your retirement.
Speaking of Social Security, if divorce finds you within chipping distance of retirement, you will want to contact the Social Security Administration. If you are 62, were married for at least 10 years, have been divorced more than two years and have not remarried, you may receive benefits based on your ex-spouse's Social Security record, even if he or she has not applied for benefits. If you are raising a child younger than 16 years old from the marriage, you may receive benefits on your ex-spouse's record even if you were married for less than 10 years. In most cases, you can expect the same amount you would have gotten if you had remained married, and possibly all of it if your ex-spouse dies. The benefits you draw do not affect amounts due to your ex's current spouse.
9. Guard your health coverage.
Sadly, divorce often forces one party to sacrifice health care coverage. Don't let this happen to you. One uncovered medical emergency can cripple your finances. Under the COBRA program, you are guaranteed 18 months of health coverage, albeit at rates that might induce cardiac irregularities. If you have no other avenue for affordable coverage, keep the COBRA plan in place until you find one. "You can't afford not to think about things you need such as health insurance, disability and life insurance," says Hayden. "If you can't afford all these things, you really should consider getting rid of the house and downsizing."
10. Dust yourself off and start living.
Yes, you've survived a train wreck. If you accomplished most of these steps, you are more aware than you've ever been of your true financial picture and what you need to do about it.
If you receive a lump-sum payout, don't splurge for revenge or because you feel you deserve it. There is a wealth of financial planning help online. Bankrate.com is a great place to begin and, when you're ready, consider hiring a financial planner to help you sort out your newly single money situation.
Financial experts recommend that you pull your credit report three months after the divorce and clean up any loose ends. Again, Bankrate has form letters to help out with this task.
Most importantly, remember that living well is possible whatever your net worth or marital status.