Money milestones: How to prepare your money for a divorce

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Money milestones: How to prepare your money for a divorce

There is no one-size-fits-all manual for getting divorced. When spouses split, many variables come into play, including state laws, income and assets, dependents and whether the divorce is amicable or contentious.

But you generally need to have three financial priorities to get ready for a divorce: disentangling yourself from your spouse, protecting the finances of yourself and any dependents, and establishing stability as a single person.

Accomplishing these goals will take some doing. Here’s how to prepare your money for a divorce.

1. Perform a financial inventory

One of the first things you and your spouse should do is complete a full inventory of your finances. This inventory should include income, debt, retirement accounts, bank account balances, and property such as homes, vehicles, and valuables for both yourself and your spouse. A spreadsheet that lists out each item and its value will come in handy later.

“When you are preparing for a divorce, start by taking an inventory of all of your assets and liabilities. Include the value of each item/account that's listed. If you are not sure of the value and it's going to become an issue of contention, have it appraised,” said Leah Hadley, founder at Great Lakes Divorce Financial Solutions.

You will need to disclose all income, assets and liabilities during divorce proceedings, and you may be required to provide tax returns, bank account statements, retirement and investment account statements, documentation of existing debts, pay stubs, and a list of the assets and liabilities that were brought into the marriage and acquired during the marriage, said Hadley.

How the finances and property are divided depends on state law and other factors. While it may be tempting not to disclose certain income or assets, full transparency is the best policy, as dishonesty could lead to financial penalties and other legal consequences down the road.

If your spouse withholds financial information you need, you may be able to request it during discovery or take the issue up with the court. Family law courts have ways to compel spouses to turn over financial documents.

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2. Establish the date of separation

Many states use the date of separation to make important decisions regarding the divorce. The definition of the date of separation varies between states, but it’s usually the date that spouses no longer live together as a couple, or in some cases, when at least one party declares their intention to separate, such as when they file for divorce.

The date of separation affects how income and property are split. In many states, income and property acquired during the marriage but before the date of separation are considered joint property and split accordingly, while income and property acquired after the date of separation are considered separate property.

In some states, a spouse who will pay child support or alimony becomes responsible for the support starting from the date of separation. The date of separation also determines when spouses can pursue other relationships without committing adultery in most states.

For these reasons, it’s important to know how your state defines date of separation. It’s also a good idea to have supporting evidence that provides the date you and your spouse separated.

3. Start separating your finances

Withdrawing funds and closing joint accounts doesn’t necessarily protect any money from going to your spouse. Documented assets and income will be reviewed and allocated according to your divorce proceedings. In some cases, determining how to split accounts is a legal affair that should be left to your lawyers or the courts.

But if you can, proactively disentangling your finances from your spouse’s serves a number of practical purposes. It allows you and your spouse to start the separation process. It helps protect you from poor financial decisions made by your spouse. And it allows you to start working toward financial security on your own.

You should open your own bank account and make sure to notify your employer and update your direct deposit information if necessary. This account should be established after the date of separation and used for your own personal transactions.

Some spouses agree to maintain a joint checking account to handle mutual expenses and bills, especially if they live together while the divorce is pending. If the split is amicable, you may be able to close joint accounts and divide the funds 50-50, though the final divorce settlement may change the way things are split. If it’s contentious, you may want to freeze accounts until the courts dictate what should happen.

Debts can be trickier to separate. Consider freezing joint credit cards and agreeing on a set amount to pay down your debts while your divorce is pending. You may want to split debt payments down the middle, or assume responsibility for different debts. Either way, debts will be divided according to divorce proceedings.

4. Check your credit reports

Divorces cause a lot of financial upheaval. You’ll likely be closing old accounts, opening new ones, shifting debts between spouses and more. All these actions can drastically alter your financial landscape and affect your credit score.

Check your credit reports to review the information within and verify that it’s accurate. This will give you a baseline of your credit before your divorce. As you make changes, such as paying off a credit card, you’ll want to make sure those changes are reflected on your credit report. Remember, changes are not instantaneous and old accounts can stay on your report for up to seven years.

You will need to continue to monitor your credit after your divorce to look for inconsistencies, mistakes and unpaid bills that got lost in the mix. You may even want to make sure your ex isn’t opening new accounts in your name.

5. Start establishing financial independence

Whether you were the sole breadwinner, completely dependent on your spouse or somewhere in between, getting divorced means you need to start establishing financial independence, which involves several key steps:

Create a budget

You will need to create a budget to ensure you are living within your means. You can use our simple spreadsheet to draft a budget that reflects your new financial reality.

“If you don't currently maintain a budget, this is a really important time to start. Identify all of your current sources of income and all of your current expenses. Once you have a good working budget on your present situation, begin putting together a post-divorce budget,” said Hadley. “In most divorce cases, the income is going to go down while the expenses are going to stay relatively the same. That may mean you need to make some big changes to continue living within your means. For example, one of the biggest mistakes that people make in divorce settlements is keeping a house that they can't afford.”

Open your own accounts

You need to establish your own accounts leading up to and following your divorce, including bank accounts, credit cards, utilities, and more. While you may need to spend some time getting back on your feet, don’t neglect future planning. Establishing an emergency savings fund and a retirement account is crucial, especially if you were previously relying on your spouse’s income.

Don’t forget to establish your own insurance policies or update your current ones. Health insurance, auto insurance, renters insurance, homeowners insurance and life insurance plans are all necessary to protect your health, property and loved ones. If you already have adequate insurance, make sure to update the plans and beneficiaries accordingly (in some situations, such as if your ex shares custody of your children, you may want to leave the beneficiary the same).

Start building credit

Building credit is important for the newly single person, especially if you didn’t have a strong credit history before. Getting a starter credit card for everyday purchases can help you start building credit. Remember, the single most important factor in establishing credit is paying your bills on time.

“If you do not have a credit card in your own name, establish one. Start making small purchases each month and paying the balance off in full to start building your credit history,” said Hadley.

6. Hire professional help

There is a wealth of divorce-related content freely available on the internet, and it’s possible to negotiate a divorce settlement on your own if you and your spouse want the same outcomes. The average cost of a divorce for a single spouse at $15,500, according to a survey from Nolo, a publisher of legal books and software, so it’s understandable if you want to cut costs.

But hiring a divorce attorney can convey many benefits:

An attorney can explain your rights in a divorce under your state laws.
An attorney can help you get organized and stand up for yourself in ways you may not have known about otherwise, especially if things become contentious. This applies to finances, custody of children and the terms of your divorce agreement.
Even if you and your spouse put together an agreement yourselves, an attorney can review it to make sure it’s fair and legitimate.

The same goes for financial guidance. While you may be willing to handle your finances on your own, a financial adviser can help, especially if your spouse managed the money in your marriage.

“I highly recommend engaging a certified divorce financial analyst in your divorce process and that's not just because I am one. I became a CDFA when I realized the huge financial mistakes people are making in their divorce settlements,” said Hadley. “CDFAs are taught to look at both short- and long-term implications of financial decisions, maximize the marital estate by looking at creative settlement options, and to minimize taxes and fees. The support of a CDFA can save you a lot of money by ensuring that you don't make some very expensive financial mistakes in your settlement agreement.”

Recommended reading

Check out our interview with Hollywood attorney Laura Wasser on making your divorce affordable.

Nolo’s DivorceNet explains why the date of separation is so important.

LegalZoom provides guidance on separating your finances from your spouse before divorce.

Credit bureau Experian offers some tips on building credit.

DivorceNet explains how to know if you need a divorce attorney.

Image: Aleksandar Nakic