Divorce can be a frightening and emotional situation that no couple wants to think about, but when the worst happens, the financial ramifications are one of the many obstacles that partners must deal with. Dividing assets, paying off joint credit card debt and making decisions about housing can be extremely costly, particularly in cases in which one spouse is unemployed or makes significantly less than their partner. As divorce has been known to leave individuals in a precarious financial situation, mapping out a plan to deal with the money aspect of a separation can give them a little more control.
In order to being planning ahead, spouses must know where they stand financially, both as individuals and as a couple. Couples should tally up their separate income, any savings, trusts or investments and other income sources that solely belong to them. Knowing this can help each person make decisions about housing affordability, transportation and other future needs when the assets are divided. It’s also important for couples to address any jointly-held debt they have. This includes credit cards, loans and mortgages. A common mistake some couples may make is failing to understand that if both names are on a credit account, they are both equally responsible for ensuring payments are made. It does not matter if only one person made the charges or managed the loan. Any missed payments or failure to repay the balance will affect both parties equally. Therefore, partners discuss an arrangement to pay the balance in full and then close the account to avoid future charges.
Establishing solo financial accounts
After closing joint accounts, individuals should consider opening a new credit line to begin building credit in their own name. This is particularly true after long-standing joint accounts were closed, as this may cause their credit score to take a hit. Establishing good credit will be essential to getting approved for housing, taking out a new auto loan and potentially securing employment and favorable insurance rates.
In addition to opening new bank accounts as well, consumers may also need to make decisions about retirement and healthcare. For example, opening an IRA or investing more in an employer-sponsored account can help adults start planning ahead for their post-working years, as the loss of their partner’s retirement income may make maintaining their desired lifestyle during their golden years more difficult.
Lastly, living on a smaller income can be challenging for newly-divorced individuals, and relying on a budget is essential to avoiding debt and disciplining spending. As these steps can be difficult, men and women might turn toward a credit counselor or financial advisor to assist them in developing a long-term financial plan that incorporates budgeting, building credit, planning for retirement and accounting for future health care needs.