Everyone enters a marriage with life-long expectations. Unfortunately, around 44.6% of marriages end in divorce in the U.S, according to the Centers for Disease Control and Prevention®.
Going through a divorce can be a difficult process, no matter how amicable the break-up. And one of the bigger challenges during this time may be how to wisely manage your finances.
While this might appear like a daunting task, you can accomplish your financial goals much easier than you might think. How long it will take to sort out your divorce and financial settlement will vary depending on the situation, but this is a necessary aspect of divorce.
If you need to sort out your finances during or after a divorce, keep these eight important considerations in mind:
1. Did you sign 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, then this agreement might override state law and determine how marital assets are distributed — most likely with you keeping all of yours and your spouse keeping all of theirs.
2. Update bank accounts
As part of a married couple, you most likely have several joint bank and credit accounts with your spouse.
During a divorce, one of the first things you should do is to open a new individual checking account, and consider opening a new savings account as well.
Use the new account for all your own personal future deposits and expenses, as the old joint accounts will need to be properly split between both spouses. This might need to include redirecting any direct deposits and updating any automatic payment information.
An Access Checking account with no monthly fee and easy requirements can be a good first step in this process.
Making a clean separation of your finances early can help reduce complications later on when it is time to formally divide 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.
3. Collect the pertinent info and docs
You will need to have a clear and accurate accounting of your total current financial situation. This means you will need to gather up all recent:
- Bank statements (from all joint checking and savings accounts).
- Credit card statements.
- Mortgage statements.
- Investment portfolio statements.
- Income streams regardless of source.
- Debt and liability documentation.
- Pension contributions.
- Life insurance policies.
This should cover essentially any documents that relate in any way to you or your former spouse’s money. The information in these statements will help you determine exactly how much money is coming in and going out each month.
Armed with this data, you and your former spouse can calculate your standard of living and how much money will be needed by each person to maintain your current lifestyle. This will come in handy later on in the divorce process.
4. Try for mediation first
Contrary to popular belief, not all divorces require a court proceeding. If you have not yet gone through your divorce, it could be in your best interest to try using mediation first.
Mediated divorces are typically faster, more peaceful and, best of all, considerably less expensive. This route can alleviate the financial burdens of having to retain a lawyer and pay for additional court costs.
Since there is a good chance you might need to save as much money as you can to start rebuilding your life following the divorce, mediation may potentially be a solid way to protect your assets.
5. Lawyer up, if needed
If both sides of the divorce are unable to resolve financial matters by mutual agreement, it will require court intervention to provide a final, legally binding decision on the division of assets.
In this case, you should seek out legal advice from an attorney who routinely practices divorce and family law.
Applying for a court proceeding for divorce typically happens when both spouses are unable to agree on how to properly distribute their joint property. After both parties present their sides and list off the assets and debts to court, the judge will draft a consent order that establishes any agreed financial arrangements following a divorce.
The consent order is 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 is known as a clean break order, and it fully severs all financial ties.
Equitable Distribution States vs. Community Property States
How a court orders distribution of assets varies from one state to the next. The majority of states fall under the category of equitable distribution states, where assets are divided between both spouses in a fair manner, according to LegalZoom®. Note that fair does not always mean a clean 50-50 split. The judge will consider a range of factors when determining what constitutes equitable, including:
- Marriage length.
- Each spouse’s health and age.
- Each spouse’s income and earning capacity.
- Standard of living maintained during the marriage.
- Property values.
- Other asset values.
- Debts and liabilities.
In an equitable distribution state, one spouse may potentially be court-ordered to give up more property or assets for long-term spousal maintenance.
In contrast, nine states are community property states — Arizona, California, Idaho, 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. Meanwhile, separate property is owned by only one spouse, and would have been acquired before marriage or after separation.
During the divorce, all community property is divided equally, as opposed to equitably. Separate property is not factored into this decision, and remains the property of the spouse who acquired it originally. Separate property may include land, a retirement fund or an inheritance, but there are exceptions to these rules.
6. Review your retirement portfolio
If you have been saving for retirement, you might have some holdings that will require review and potentially updates.
Any life insurance policies you have should be updated to ensure you list the proper beneficiary. If you had your spouse listed, you might want to swap it out for a child or another loved one.
Consult with your employer’s human resources department for guidance on your 401(k) or pension plan.
If you are close to cashing it out, consider waiting until after the divorce has been finalized. If you acquired the 401(k) during the marriage, it could be considered community property if you live in that type of state. If you acquired it before marriage, it might be considered separate property.
Similarly, if your spouse has the 401(k) or pension, you might be entitled to it if it is community property. This would require a Qualified Domestic Relations Order (QDRO) that has been approved by the court and by the retirement plan’s Plan Administrator.
7. If children are involved
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 a civil agreement on how to best share custody and financially support them until they turn 18.
This child maintenance support should include such items as groceries, rent, clothing, school costs and any additional entertainment or extracurricular activities. Special health care costs should also be kept in mind.
If you and your spouse are unable to reach an amicable agreement on shared custody and financial support, you will need to obtain a court order with any child maintenance awards and custody placement.
8. Rework your estate plan
If you do not already have an estate plan in place, this is a good time to have one drafted by an estate planning attorney. Now that you no longer have a spouse to make decisions in the event that you lose mental capacity due to an injury, disease or accident, you will need someone else to step in for this role.
Your estate plan covers how to disburse all of your assets, whether through a will or a trust.
It will also generally include advanced medical directives, such as powers of attorney for finances and health care.
If you already have an estate plan in place, a divorce serves as a major life milestone that 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.
Want to learn more about opening an Access Checking account during a divorce or other financial considerations to keep in mind? Reach out to the team at Comerica Bank.