Planning

Get a New Financial Life After Divorce

Money plays a role in the success, or failure, of a marriage, but your relationship with money and your spouse doesn’t end when you’re facing divorce. In fact, that’s when your financial involvement and knowledge becomes more critical.

Bradford Winton, a financial planner and portfolio manager at Legacy Solutions, Inc., says to consult a financial planner as soon as you know you will be entering into a divorce. Not only can he or she help you manage your changing lifestyle in the short-term, they can guide you towards building a solid financial future. Here are some key things to know so you’re prepared for your new financial life, after divorce.

Be Careful What You Wish For

You may feel the urge to lay claim to every asset you can, but remember, with such items comes costs, responsibility, and tax implications.  “It’s tempting to ask for the house, but your residence, while valuable, is an asset that requires mortgage payments and a considerable amount of upkeep. Instead, consider requesting a portion of your spouse’s retirement plan, a tax-deferred and potentially appreciating asset,” says Ameriprise Financial’s Vice President of Wealth Strategies, Suzanna de Baca.

Along those lines, taxes are a consideration around who is paying, and receiving, child support and alimony. “Alimony is deductible for the person paying it, and taxable to the person receiving it. Child support is neither deductible to the person paying, or taxable to the person receiving it,” says Winton.  When it comes to retirement accounts, Winton advises seeking the help of a CPA, especially if you receive money from a 401(k) or IRA. A professional can lend expertise both in assessing the real value of the account, and helping to determine what you should do with the money to minimize taxes and fees associated with it.

Do Your Housekeeping

Update names on all accounts, insurance documents, wills, and other financial documents to reflect current authorized users and beneficiaries. Remember that you must proactively change names on deeds and titles following a divorce, if you’ve been granted the assets. Cancel joint credit cards to confirm that neither spouse is liable for one another’s financial actions going forward.

Plan for Your, Their Future

Once you divorce, your budget changes. Be realistic about your current assets, and new lifestyle, that you will have following the divorce.  If you have been granted property, budget not only for the monthly mortgage, but the additional insurance, maintenance and upkeep that you may have previously handled “in house.”  If you have kids, plan for both their current and long-term needs. A Rice University study published in the Journal of Family Issues indicates that kids of divorced homes get less financial support from parents, even if the parents remarry. Don’t assume that your spouse will have the money to cover education, or that you can always turn to loans. The qualifications for securing educational funding have changed in recent years; you or your child may have trouble getting a competitive student loan. Remember that although you and your spouse are no longer sharing a budget, you do share a child. Commit equally to preparing for, and sharing, all child-rearing costs, short and long-term.

Insurance needs change with divorce, especially in the case of life insurance. Charles Hamowy, CFP and CPA for Ameriprise Financial says “many times life insurance is called for in a divorce agreement. This is especially critical when child support payments are required. The question is, how much insurance should be required? A policy that falls short of what is needed can have devastating impact.” Review divorce covenants with your financial planner, and confirm that all coverage amounts are adequate before agreeing to any terms.

You’ll also need to update coverage and beneficiaries for other insurance policies like health, disability, auto and property insurance.

Rebuild

Your credit is important after divorce, both to rebuild your financial security, and provide a framework for future loans you wish to secure. Pull a copy of your credit report and understand what your score is based upon. Report errors that need correction to the major credit bureaus immediately. You can obtain a free copy of your report once a year at annualcreditreport.com.

If you and your spouse kept joint finances, you may need to spend some time rebuilding your own individual credit. Even if you were married for several years, each of you have your own individual credit histories, which will include only the accounts that are in your name,” says Maxine Sweet, Experian’s vice president of public education. Even though the report is in your name only, joint accounts you shared are also reported on each individual credit report. (This underscores the importance of “financial housekeeping” during a divorce; both of you are responsible for the debt incurred on those accounts, as long as your name is on it. Likewise, a missed payment will impact both of your credit reports).

Winton advises rebuilding your individual credit history by obtaining a credit card, using it regularly, and paying it off each month. Other bills like cell phones, utilities do little in terms of establishing credit worthiness; you need revolving unsecured debt to have the most impact. If you have challenges obtaining an unsecured card, obtain a secured one, and slowly rebuild your credit worthiness.

Stephanie Taylor Christensen is a former financial services marketer based in Columbus, OH. The founder of Wellness On Less, she also writes on small business, consumer interest, wellness, career and personal finance topics.