7 ways to protect yourself financially in a divorce
By Andrew Housser
In the United States, more than 800,000 couples per year divorce. Unfortunately, divorce not only brings a great deal of emotional baggage and heartache – it also can be very expensive financially. Court and attorneys’ fees can add up to tens of thousands of dollars. Some studies estimate that divorcing couples can lose an average of 77 percent of their net worth (the value of assets after debts are repaid). And after the divorce, there is the cost of running two separate households.
If you are dealing with a divorce, there are things you can do to protect your financial resources. Below are seven considerations to be aware of when a marriage or other relationship ends.
1. Know who is responsible for debt. Your divorce agreement will specify which partner is responsible for paying which debt. This clarification will include joint debts as well as individual accounts. Be aware that if your name is on a debt with your ex-spouse’s name on it, and he or she does not pay the debt, the creditor may come after you.
2. Pay off or refinance debts before the divorce. It is a good idea for both parties to refinance their debts in their own names. This may mean transferring credit card debt from joint cards to cards held by one individual, and then closing the joint accounts. If one partner keeps the family home, that partner should refinance the mortgage in his or her own name. Some divorce agreements include a provision with a time limit for this refinancing, to ensure that the other ex-spouse is not held liable for mortgage debt at a later time.
3. Watch out for undisclosed debts, especially in community property states. Nine states have “community property” laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. These states divide assets and debts 50-50 between partners. This means that a divorcing spouse could be equally liable for debt – even debts one partner does not know about. Discuss this possibility with your attorney. A good rule of thumb is to clearly disclose all debts before the divorce. It is also a good idea to request and review your credit profile before signing a final divorce agreement.
4. Protect yourself and your family with insurance and planning. Sometimes, after a divorce, buying new insurance is far from top of mind. A single parent, however, may have an even greater need for insurance due to unforeseen life circumstances. Protect your family and your assets with life insurance, a will, and provision to care for any young children.
5. Prepare for retirement. Post-divorce, your retirement plans will likely change. Check with a tax advisor to understand your state’s laws when it comes to dividing retirement accounts. Be sure your advisor has worked extensively with couples who are splitting up assets, and can make sure all details are handled appropriately. For instance, agreements should specify that accounts will be divided on a percentage basis, not by a dollar amount. Specifying a dollar amount could result in significant loss for one partner if the market changes.
6. Change your beneficiary designations. It is important to update your will after a divorce. It also is important to file new beneficiary designation paperwork for retirement plans and insurance policies. In most cases, funds will go to the person listed as your beneficiary, even if that person is your former spouse. Updating these forms ensures that your wishes will be honored.
7. Know your options if you and your spouse have more debt than you can pay. Consult a good attorney to be sure you completely understand your debt obligations after your divorce. If you and/or your spouse have large amounts of debt that you are struggling to pay down, talk with a reputable debt relief provider to discuss options before the divorce is finalized. Especially if you suspect that your spouse might file bankruptcy after the divorce, work closely with your attorney to protect your interests. Child support payments cannot be eliminated through bankruptcy or other means.
One final note for those who are planning a marriage, or thinking about a second marriage: Keep an eye on how much you spend on your wedding. A 2014 study by Emory University professors found that the less costly a couple’s wedding, the longer their marriage lasted. That is a good start to keeping a marriage debt-free!
|Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.|