Divorce is one of
the most traumatic events that in a person's life, usually only surpassed
by the death of a spouse or the loss of a child. The emotional aspects
are difficult to handle, and then there are the issues with children and
the financial aspects.
The financial aspects
that are ultimately finalized by a court ruling usually fall into three
categories - alimony, child support and the division of assets. These
are big issues and can be complex. The resolution will affect all parties
for the rest of their lives and the assistance of a qualified divorce
attorney is essential.
The divorce rules
and decision tendencies vary by state and constantly evolve as a result
of legislation and changes in society. Generally, levels of child support
have been increasing reflecting the rising costs of raising a child and
the greater level of post high school education costs. On the other hand,
levels of alimony have been decreasing reflecting the growth of two income
Here are some of the
financial ideas and issues to keep in mind:
1. Financial and
other assets. In all cases, you will need to identify the assets that
each spouse owns and those owned jointly. Having three personal balance
sheets (hers, his and theirs) will probably be necessary. Be sure to include
all your financial accounts, cars, real estate, jewelry and household
items. As you prepare these statements, you should try to identify the
source of the item (purchase, gift or inheritance) and when you acquired
2. Financial income.
You will need information on wages, investment income and other sources
of income. Copies of the past several years' tax returns will come in
handy. You should also get copies of credit reports for both spouses.
3. Division of
property. Most states use a concept of equitable distribution. Assets
that are acquired before marriage or that are inherited usually stay with
the person bringing them to the marriage. Assets that are acquired while
married are divided. The way those assets are divided is often the most
contentious aspect of the divorce process. The courts usually take several
factors into account - what was contributed to the purchase, length of
marriage and other services provided by each spouse - when making decisions.
for debts. Generally, you are responsible for your debts and your
spouse is responsible for his or hers. However, most states equally divide
debt incurred jointly during your marriage. The divorce decree will spell
out the actual division of those debts. As a result there are several
steps you should take:
- Create a list
of all your debts, including mortgages, auto loans, credit cards, loans
from retirement plans, loans payable to relatives and all other loans.
- Build your own
credit record while you are married by having credit in your name. While
you may share debt on a mortgage, you should have your own credit card.
- Close joint bank
and credit card accounts as soon as possible and open individual ones
if you do not already have them.
- Pay off any credit
card balances as soon as possible, preferably in advance of the final
5. Key financial
documents. Locate and make copies of things like tax returns, insurance
policies, retirement plan documents, wills, loan documents, employment
contracts, business agreements and investment records.
6. Health insurance.
If both spouses are covered under one spouse's plan provided by the employer,
be sure that the final agreement spells out how continuation will be provided,
if at all. The costs of health care are too high to not consider this
7. Income taxes.
Your filing status will change because you can no longer file a return
using the "married, filing jointly" rates. If there are children,
your divorce decree should identify which party will claim the children
as dependents. In addition, if you have been filing jointly, any IRS claims
can continue to be against both of you. If there are any outstanding issues
with your past tax returns, you should get advice from a qualified tax
8. Retirement plan.
If an IRA or one spouse's retirement plan assets are transferred to the
other spouse as part of the property division, you should consult with
a tax professional to make sure the tax deferral remains in effect.
After the divorce
is final, there are some actions you should take:
- Assess your financial
situation and determine what changes may be needed.
- Make sure your
credit cards, bank accounts and investment accounts are in your name
- Check your credit
report to make sure it reflects your new marital status and that it
- Change the beneficiary
designations on any IRAs, retirement plans, life insurance policies
and your will. If you do not have a will, now is a good time to get
- Review your insurance
coverage to make sure it is sufficient. It is also a good time to review
your deductibles. Higher deductibles may reduce your premiums but subject
you to more risk.
- Review your new
income tax situation and take prudent steps to keep your taxes low.
- Review your investment
accounts and strategy. As a single person, your goals and risk tolerance
may be different and your investment strategy should reflect those.
A divorce and its consequences are never easy. Having an understanding
of the financial aspects of divorce and your new status as a single person
can reduce the stress and help you prepare for the future.