June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Divorce can be one of life's most stressful ordeals. Trying to make clear-headed, well-informed financial decisions while going through this very difficult time can be an overwhelming challenge. The good news is that divorce provides you with an opportunity to start over both emotionally and financially.
Below are a few tips to help you achieve financial security and independence after a divorce.
Protect and prepare yourself
In marriage, both partners often understand and work together on financial items like budgeting, filing taxes, making investments, and managing debt. Once it's clear that divorce is the final decision, you are going to want to take some basic first steps to prepare for life after divorce.
- Cancel any joint bank accounts and open individual accounts.
- Cancel all joint credit cards. If you will no longer be using your married name, contact your credit card issuers and have them change it.
- When your divorce is finalized and assets have been legally divided, change title on house deeds, stocks and bonds, and car(s), as necessary.
- Change your beneficiaries on investments, retirement plans, life insurance policies, and savings accounts.
- Update your will.
- Check your credit report (you can obtain a free report from each of the credit reporting agencies once every twelve months from www.annualcreditreport.com) to make sure your spouse hasn't incurred debts in your name since your divorce or separation.
Work to Get a Fair Settlement
Divorce proceedings can be very painful. In the rush to "get it all over with" and move on with life, some people don't get everything they are due. Carefully consider the financial consequences of all decisions you make during divorce proceedings. Do not willingly give up what you have a right to receive, particularly if you have custody of your children. Their financial future depends on it!
Also, be careful about receiving too much of your settlement in property or investments you can't easily sell (also called "illiquid assets"). Your primary residence is an illiquid asset. This means it is not converted to cash easily. If you have too much in illiquid assets, you may find yourself without enough cash to live off of. Many times, people find themselves having to sell homes, cars, etc. in order to meet their ongoing expenses. And when you sell a house, there will be closing costs and possible tax implications.
Adjust Your Budget Based on Your Settlement
After making it through those first legal steps of the divorce, you will need to start preparing for your financial future. You may be taking on added expenses as a result of your divorce--or you may have additional income and assets. Here are some of the more common ones:
- Alimony - The judge in the state where your divorce is finalized will determine whether or not alimony will be paid. It is traditionally granted to a spouse who has been economically dependent on another spouse for the majority of a lengthy marriage. If you are awarded alimony, the amount you receive will be taxable income. If you are ordered to pay alimony, the amount you pay will be tax deductible.
- Child Support Payments - Most states have established formulas to determine how much one parent will pay to another in child support. Unlike alimony, child support is tax free to the parent who receives it and is not deductible to the parent who pays it.
- Daycare - If you're the parent with custody of your child then providing for daycare may be a new expense for you. To help you with this expense you may benefit from the following:
- The childcare tax credit - review IRS Publication 503 to see if you're eligible.
- A Flexible Spending Account from your employer - contact your employer's human resources department to see if you have access to one.
Keep meticulous records of everything having to do with your divorce. Make arrangements to pay any bills left over from the divorce or marriage and if you are receiving (or paying) any alimony or child support, keep copies of any checks you have paid or received. Make sure you have an accurate accounting of all payments either paid or received. If any payments are to be made through a wage garnishment or through the courts, keep all documentation and keep the employer and/or the court clerks advised of any address change.
Hang in there. In the long run, many people become wealthier after a divorce, once they are free to make financial decisions on their own. Consider this a time to start over financially--with a clean slate. And follow these tips. Years from now--when you've had time to recover--you'll be glad you made the right financial decisions.