divorce: Financial Lessons

Updated: Jul 12, 2021

Whether it comes before or after the papers are signed, economic hardship is way too familiar to many couples who divorce. Following a few financial guidelines can ease the burden during this difficult time. Each year, 1 million Americans divorce. More than 80 percent of divorcing couples cite “debt and financial distress” as the primary factor in the dissolution of their marriages, according to an American Bar Association survey. Studies find that most families suffer a financial decline following a divorce as well. By taking steps to protect credit, families can come through divorce in much better shape. Bills.com, a national consumer finance portal, encourages divorcing couples to take the following steps:

1. Accurately assess all debts and liabilities. See yourself as your creditors do. Online (see myfico.com ) or by phone, you can request a "tri-merge" credit report (a summary from all three major credit reporting bureaus). Understand all of your existing shared and individual liabilities. You may want to split all of your debt at an appropriate ratio. Settle or get a judgment on how you will allocate these responsibilities.

2. Plan on how to handle your home mortgage. If you own a home, the mortgage is likely your most significant monthly payment. Be certain you understand how you will divide or resolve monthly mortgage payments, and how you will split the home's value. Decide now if one partner buys out the other now, or the home is to be sold after children are grown.

3. Budget for payments. Create a detailed budget, based on your new income level, and use free cash flow to pay off debts. Most people find the most efficient way to pay off debts is to first pay off smaller bills – starting with under $100 – then pay off loans and unsecured debt, such as credit cards, beginning with the account with the highest interest rate. Or simply pay them off from smallest to largest dollar amount. 4. Make sure your ex-spouse is making his or her payments. If possible, make provisions in the divorce agreement for reporting on resolution of significant debt. There are important implications for you personally if your spouse does not meet his or her end of the bargain on liabilities allocated through the divorce proceedings. You do not want to end up in bankruptcy if your spouse hides debt or does not pay their full share. I have seen too many ex-spouses left bewildered and in shock that they have no option but bankruptcy to stay financially afloat. And even then, that is seven wasted years of your life before you can start building your credit backup again.

Call all creditors for shared accounts (credit cards, gas cards, department store cards, phone cards, etc.). Close the accounts if you are not carrying a balance or remove your name from jointly held accounts. Remember that for jointly held credit cards, and for any other debts incurred during the marriage in community property states, you have shared liability – and thereby share any potential negative credit rating impact. This means that if your spouse does not make payments after the divorce, it could come back to haunt you and your credit rating. And if you owe back taxes, be aware that the IRS does not have to honor a decision from a divorce judgment. Please consult a tax expert or lawyer to help with your divorce tax planning. 5. Focus on rehabilitating your credit and financial health. Begin a savings plan. Reinvest any proceeds or equity that come out of the divorce proceeding and be especially cognizant of building yourself a retirement fund for the future. If you find yourself in trouble during this stressful time in which you must make many hard financial decisions, seek help from a reliable family lawyer, professional financial coach or tax advisor. Be sure to investigate your professional and most certainly seek out a financial coach that operates for the consumer, which is markedly different from credit counseling, debt consolidation, and other debt management firms. This is a very stressful and emotionally charged time in your life. It is too easy to make rash and error-prone mistakes that can haunt you for many, many years. And do not try to do this cheaply if at all possible. Your future rides on this crucial decision of divorce. Please ask for some help. You can do this!

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