How can you protect your finances before a divorce?
Even if it’s for the best in the long run, divorce wreaks havoc on your finances in the short term. Your income drops while your living expenses increase.
There’s also the cost of the divorce to consider, including paying attorney’s fees and court costs. The financial damage from a divorce gets worse if you and your ex can’t agree on how to split up property.
From difficulty communicating to differing life goals, you can see divorce coming from miles away. While you might not want to think about the dissolution of your marriage, taking action before serving (or getting served) divorce papers can help you get through the split relatively financially unscathed.
How to Protect Your Finances Before a Divorce
How any shared assets get divided during a divorce depends in large part on whether you and your soon to be ex-spouse live in a community property or equitable property state. Most states are not community property states, but with big states like California and Texas following this legal framework, close to 100 million Americans are affected.
In a community property state, you and your spouse equally own property acquired during the marriage. In an equitable property state, there’s more wiggle room for dividing up marital property.
Talking to a financial advisor, hiring an attorney, and separating your finances are just a few of the things you can do to keep your almost ex from wiping you out financially before you officially break up.
1. Hire a Divorce Attorney
Even if your divorce is completely amicable, it’s still a good idea to hire a family law attorney. You and your spouse should each have your own lawyer, as you need someone who solely represents you.
When you hire a divorce lawyer, you’re paying someone to fight for your best interests. You’re also paying for someone to protect your rights and make sure you understand what’s going on. Even the simplest of divorces can get complicated if you aren’t well-versed in family law.
Your attorney fights to ensure you get your fair share of the marital assets. They’re also the person who keeps a cool, level head when things get emotional in the courtroom.
During a divorce, it’s easy to get sucked into the tiny details or to let arguments over miniscule things escalate. Your attorney can keep that from happening by reminding you to look at the big picture, and if necessary, let the small things slide.
It’s easy to worry about the legal fees and the cost of hiring a divorce attorney. But a good attorney who helps you keep as much as what’s legally yours as possible is going to be worth the expense.
2. Hire a Financial Advisor
Whether you’re the primary breadwinner or you and your spouse earn about the same, your financial situation will change drastically after your divorce. One of the most common post-divorce mistakes people make is not making a budget or adjusting their finances after the split.
A financial advisor gives you advice about how to invest your money and what changes you might need to make once you and your spouse go your separate ways. They can help you prepare an after-divorce budget. Your advisor can also work with your attorney to help the divorce proceedings go as smoothly as possible.
When choosing a financial advisor, look for someone who specializes in divorce. The Institute of Divorce Financial Analysts trains and certifies advisors to provide support to people who are in the process of or about to go through divorce. You can use the Institute’s directory to find a certified divorce financial analyst in your area.
3. Open an Individual Bank Account
Maybe you trust your almost ex, but things can get ugly fast in a divorce. It’s not uncommon for one spouse to empty out shared accounts on the eve of a break up. Opening your own savings account and checking account before proceedings start keeps your spouse from draining you dry.
If you share an account with your spouse, open your own bank account, then transfer half of the balance from the shared account to your individual account. Let your spouse know you’re doing this, so it’s not a shock to them. Also, consult with an attorney to make sure you’re in the clear before making a move.
Once you’ve opened your new account, ask the human resources department at your job to update your direct deposit information. You want your paychecks to go to the individual account, not the joint bank account.
Having a separate account also helps differentiate your assets following a legal separation, particularly if you live in one of the nine community property states, such as California, Arizona, or Nevada. Any money you earn while legally separated from your spouse is not considered marital property. Keeping it in an individual account avoids any confusion.
4. Inventory Your Assets & Debts
Before you divorce, you need to know what you own and what you owe. Don’t worry too much about what’s yours, theirs, or jointly held at this stage. The most important thing is to know your net worth and your total liabilities. Making a list of your assets keeps your spouse from attempting to hide anything during the divorce.
Depending on your age and how long you’ve been married, you might have a lengthy list of assets between you and your spouse, such as:
- Primary residence
- Shared investment accounts
- 401(k) accounts
- Individual investment accounts
- Bank accounts
- Other types of real estate
Once you’ve inventoried your debts, make a plan for paying them off, so you don’t get stuck with them after you divorce. If a debt, such as a credit card, is in both your names, the card company can come after you, even if your ex is the person who primarily used the card.
5. Evaluate Your Insurance Needs
Specifically, you’re going to need:
- Proper insurance for you
- Insurance on the alimony/child support payer if you’re the recipient
Your insurance needs change with divorce. If you have health insurance coverage from your spouse’s job, you’ll need to buy your own plan or get coverage from your employer after the divorce. If your almost-ex is covered by your employer’s plan, they’ll need to get their own coverage.
Divorce counts as a qualifying life event, allowing you to participate in a special enrollment period. You don’t have to wait for open enrollment to come around to change healthcare coverage following a divorce. Starting research and comparing plans before the divorce is finalized allows you to choose the one that best works for your healthcare needs and budget.
Your life insurance needs also change after a divorce. If you don’t have kids or dependents or a mortgage after your divorce, canceling coverage completely can be an option. If the kids live with you and you provide most of their support post-divorce, you might need a policy with a larger benefit.
Also consider having your ex take out a life insurance policy, particularly if they pay you spousal support or child support. If something happens to your former spouse, you want yourself and your kids to be protected.
6. Change Your Beneficiaries
Before your divocrce proceedings start, take a minute to update the beneficiaries on your:
Change the beneficiaries to your children, another relative, or a charity. Once proceedings start, it’s easy to forget to update your beneficiaries, and you don’t want your ex to inherit your retirement account or reap the benefit of your life insurance policy after your death.
If you had a joint will with your former spouse, now’s a good time to make your own. Many states prevent exes from serving as executors or otherwise benefiting from a former partner’s will. To minimize the hassle of the probate process for your heirs, update your will as soon as possible.
7. Monitor Your Credit
While your marital status doesn’t show up on your credit report, getting divorced can affect your credit score. You’re still responsible for any debts shared between you and your spouse.
Your spouse can also run up loads of credit card debt on a shared card and not tell you. If they’re an authorized user on your credit card, they can rack up debt and leave you with the tab. Less scrupulous exes can use your personal information to commit credit fraud, taking out debts in your name.
If you have joint credit cards with your spouse and those cards don’t have a balance, contact the card company and ask to close the accounts. Your spouse has to be on board with this, so let them know and get their permission before closing any shared accounts.
If you have joint credit card accounts with a balance, prioritize paying them off, then close those accounts, too. The same rules apply — you’ll need your spouse’s permission before closing the cards.
Remove your spouse as an authorized user from any cards that are in your name only. If you’re an authorized user on your spouse’s card, cut up your copy and remind them to remove you from the account.
If you’re particularly concerned about a vengeful spouse, consider freezing your credit before your divorce. When your credit is frozen, no one can open an account. A credit freeze can be beneficial even in an amicable divorce, as it keeps you from opening credit accounts and falling into debt as you adjust to your post-divorce finances.
8. Consider a Prenuptial Agreement or Postnuptial Agreement
Prenuptial agreements get a bad reputation as being unromantic, greedy, superficial, or some combination of the above. But, really, they’re practical, especially if you or your spouse are bringing a considerable amount of assets into the marriage.
A prenup protects your assets if you get divorced. They also help establish your financial rights and responsibilities in your relationship, so they have value even if you and your spouse literally stay together till death.
If one spouse has massive student loan or credit card debt, your prenuptial agreement can protect the other from assuming responsibility for that debt. The agreement also protects any inherited assets you bring into the relationship, such as a family vacation home or your grandmother’s valuable wedding ring.
Writing a prenup when all is well and you’re looking forward to a life together allows you to divide any existing or potential assets while you’re both level headed.
If a prenup sounds like too little too late at this point because you’re already married, another option is a postnuptial agreement. It’s similar to a prenup, but you create and sign it after you’re married. In some cases, a postnup isn’t enforceable, so talk to an attorney before signing one to ensure it’ll hold up in court should you get divorced.
Most people end up worse off financially following a divorce. Consulting a law firm and working with a financial planner before the divorce process starts means you know what your rights are and how the split will affect your life.
Doing what you can to prepare for your divorce well in advance also helps you avoid some of the common mistakes people make during divorce, too. When you know what you own and what’s legally yours, you can avoid agreeing to whatever your spouse wants just to get things over with. Going into the proceedings prepared means you can get a new start once you get the divorce settlement.