Tips for Navigating the Financial Aspects of Divorce
It’s no surprise that divorce can be very messy. During such an emotionally charged process, it’s often difficult to make thoughtful, rational money decisions.
Here, I highlight key terms and strategies for splitting various types of assets and liabilities in a divorce.
Community property versus separate property
Community, or marital, property refers to any assets or possessions acquired by one or both spouses while married. Individual, or separate, property refers to any property owned by a single spouse before the marriage, or an inheritance received while married. While specific laws vary by state, typically community property is included in the property division process and divided between the spouses, while individual property that has not been co-mingled with marital property remains in control of the spouse who owns it.
The family home
Figuring out what to do with your home can be an emotional decision. One option is to sell the home and divide the proceeds. If you carry a mortgage and one spouse wants to remain in the home, there are two main options to consider:
- Obtain a new mortgage – Banks typically don’t allow borrowers to simply remove one name from a mortgage. Instead, you’ll likely need to refinance the home in one person’s name. Depending on your particular financial situation, it may be difficult to qualify for a mortgage on your own. Consulting with a mortgage lender during the divorce process can bring much needed clarity to your options.
- Agree on co-ownership – It is possible to leave both names on the house and enter into a co-ownership agreement. However, this can be a complicated solution, especially if you are not on good terms with your soon-to-be ex-spouse, as the two of you will continue to be financially connected.
Bank accounts are one of the first things that should be tackled as part of your divorce. Begin by making a comprehensive list of all accounts, then make a note of how the account is legally titled. Is the account titled in an individual name or owned jointly? This detail will be important to determine which accounts should be closed or retitled post-divorce.
The quickest way to dissolve shared accounts is by closing them with your spouse, but consult with your legal counsel about either transferring money or making any account changes before the divorce is finalized. You may also want to ask your legal counsel about when to open a new bank account in your name only to help ensure you’re able to pay for expenses throughout the divorce process.
Employer-sponsored retirement accounts
Figuring out who gets what retirement assets can be difficult, and dividing assets held in 401(k)s and 403(b)s is more complex than splitting up a checking account. It’s important to divide these accounts in a manner that protects their tax-advantaged status and avoids early withdrawal penalties.
When dividing retirement accounts, you’ll need to submit a Qualified Domestic Relations Order (QDRO) to the retirement plan provider. A QDRO is a legal document typically drafted by an attorney and submitted to the court for approval after the divorce has been finalized. This court order will outline how retirement plan assets are to be split and direct the retirement plan provider to do so. A QDRO helps protect both spouses and ensures that assets are divided according to what was agreed upon in the settlement agreement.
Credit cards and loans
It’s not only assets you’ll need to divide in the divorce, but liabilities as well. Start by obtaining a copy of your credit report to identify exactly what credit cards and loans are outstanding. Then, determine whether you’re a joint owner or an authorized user on each account.
There are three common options for handling debt in a divorce:
- Agree to pay off all balances from marital assets.
- Agree for each spouse to maintain loans or debts in their individual name and continue making respective payments post-divorce. This may entail refinancing joint obligations.
- Agree on a detailed plan to pay off joint liabilities post-divorce.
Obviously, the best option is to pay off all outstanding loans and credit card balances so both individuals can start their next chapter debt-free. As this may not be possible for everyone, option two is the next best scenario since this option protects your credit score from being impacted by your ex-spouse’s actions (or non-actions) and allows you to sever ties with your ex as soon as possible.
If you and your ex-spouse decide to pursue option three and continue paying off debt together post-divorce, make sure the settlement agreement includes a detailed plan to ensure the best possible outcome for both of you. Keep in mind that even the most detailed legal document could potentially put your own credit score at risk if your ex-spouse doesn’t hold up his/her side of the bargain.
Also, if you don’t already have a credit card in your name, speak to your legal counsel about applying for one to begin building your own credit history.
At Creative Planning, we understand how challenging navigating the financial aspects of a divorce can be. We focus on helping you determine your financial need, gain an understanding of your options and make decisions that are in the best interest of you and your family with confidence. For help dividing your assets in a divorce, or for any other financial matter, schedule a call with a member of our team.