Divorce is financially and emotionally a stressful event. Knowing how to navigate your finances during this time will help minimise the collateral damage that can result from the divorce.
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“Money may not buy love, but fighting about it will bankrupt your relationship”
— Michelle Singletary -
Ben and Jen
Ben and Jen had been married for over 20 years and had two teens. They decided to separate. Six months later, they sold the family home, and Jack bought a new house. He put his new girlfriend, Sarah, on the title. Ben claims he met Sarah a month after splitting up with his wife. Jennifer relayed a very different version of the story. But that’s not the point of this article.
What was surprising was that Jack put his new girlfriend on the title of the new house without her putting a dime into it. As an advisor, I would advise getting to know someone for a while before adding them to the title to your house!
Jen and Commingling of Her Inheritance
When Jen’s grandmother died a few years ago, she received a large inheritance from her. Jen used a large portion of it to pay down the mortgage on the home she and Ben owned.
It sounded like a great idea at the time. It’s common for people to want to pay down debt when they receive a large sum of money.
People don’t generally go into marriage with the idea of splitting up. However, by using her inheritance to pay down a property she held jointly with her husband it resulted in her commingling an asset that was just initially hers (the inheritance) and now became part of an asset she held jointly with her husband (their home).
This is unfortunate. The question is; would Jen’s grandmother have left her $500,000 if she knew that half of it was going to end up in the hands of her husband?
The Divorce
As part of the divorce settlement, the family home had to be sold and the proceeds were divided equally. Michelle did not get a cent more even if she did put more towards the house! Since Jack’s income was three times that of Michelle’s, he was able to qualify for a larger mortgage whereas Michelle had to downsize.
Issues around divorce and separation differ from province to province and state to state.
“During a divorce, the two most contentious issues often cited are usually finances and children — In that order,” says Dan Couvrette, publisher of Divorce Magazine. In British Columbia, Canada, a couple would only need to be living together for a year to qualify for common-law status, which would grant them legal rights to property.
Take your time before jumping in with someone new! Even if you don’t put them jointly on an asset, they can lay claim to part of it merely for the fact of living common-law.
The difference between separation and divorce
Separation: when two people who have been living together decide to live separately and are not likely to live together again. Separation doesn’t end the marriage — a divorce is required to do that legally.
In The Event of a Divorce
A Divorce is the legal ending of a marriage by a court. When you separate or divorce, you will need to decide:
● Who will stay in the home?
● Who will take care of the children?
● Who will pay family debts and expenses?
● How much will be paid in terms of child support?
● And alimony (if applicable)?
● How you will divide any property.
● How you will split your pensions.
Decide on a separation agreement dealing with all the issues above, and, as soon as possible, get one put in place with the help of a lawyer or notary. Once the agreement is signed by both of you and a witness, it becomes a legally binding contract that you must honor.
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Who You Need To Consult In The Event of a Divorce
If you and your former partner need assistance in reaching an agreement on these issues, you can consult a number of resources:
● lawyers and notaries — who specialize in family law.
● mediators
● arbitrators
● financial advisors
● Credit counselors.
If you cannot agree on certain issues, you may also go to court and ask a judge to decide. The court process takes time and money.
Who You Need to Consult if You’re Separating:
Lawyers and Notaries
Be sure to see someone who specializes in family law. If you cannot afford a lawyer, you may be eligible for legal aid for advice on certain issues, such as custody and support payments through your local government.
Mediators
If you can’t agree on how to divide your property and other financial matters, another option is to work with a mediator.
This is a neutral third party who can assist you in deciding on a mutually agreeable solution. They cannot impose a decision on you, so you and your former partner must be willing to work together.
Many people prefer mediation for a less contentious process.
Financial Advisor
Consult a financial advisor to help you understand the financial and tax implications related to separation and divorce. Such as the impact of a divorce on pensions and retirement accounts.
Credit Counseling
For an objective approach to dealing with the financial fallout from a divorce or separation, a credit counselor can help.
● Some agencies offer support programs that are free of charge.
● Getting credit counseling by itself (without entering into a debt management program) will not affect your credit score.
Take Stock of Your Financial Situation:
● Make a list of properties you own jointly or separately. Same with debts and expenses.
● List your financial institutions and account numbers for your bank accounts, credit cards, loans, and investments.
● Know your rights and responsibilities related to joint accounts and loans.
● Make sure you have copies of financial information: statements for outstanding loans, recent pay stubs, and your tax returns for the past three years.
● When you co-sign for a loan, credit card, or line of credit, each of the joint borrowers has the right to receive the same information from the lender about the loan.
For example, if you co-signed for a credit card with your former partner, the lender must give each of you copies of the credit agreement and the monthly statements, unless you consented either verbally or in writing to waive this right.
● If you have already waived your right to separate disclosure, you could change your consent if you decided you would like to receive information about the joint account or loan.
● You should decide right away what to do about any joint assets or debts you share with your partner. Get advice from your lawyer on the best way to handle these.
● Contact your financial institution for advice on how to protect your interests in your joint accounts, such as preventing further borrowing from a line of credit or withdrawals from a joint bank account.
● While you are working out your separation or divorce, keep bills and receipts for expenses related to your family. This will be helpful later when you are working out how to divide your property.
● If you don’t close your joint accounts and loans, both of you may continue to be legally entitled to the funds in any joint accounts, as well as responsible for repaying any debts, even if your separation agreement states that only one person is responsible.
● If one borrower doesn’t pay the debt, the lender can demand that any borrower listed in the loan or credit agreement pay the entire amount or continue making regular payments.
● For certain credit cards, authorized users (also called “secondary cardholders”) can be held responsible for any outstanding balances, even if they did not sign the credit card application. To find out whether you are responsible, read your credit agreement or ask your lender.
Putting Your Financial House in Order After A Divorce
A divorce is often described as a financial tsunami. You will need to pick up the pieces and rebuild your financial house.
● Once you have closed joint accounts or paid off joint loans, check your credit report to make sure your financial information has been updated. Establish your own accounts and deal with joint accounts.
● Open your own checking and savings accounts.
● Establish your own credit if you haven’t done so already.
● Update your direct deposit information for paychecks, government checks, and any other regular payments you receive to ensure they are deposited to your own account. Make sure you have a credit history or start one.
● It’s important to have a credit history if you want to apply for credit such as credit cards or a mortgage. Some landlords and employers will check your credit history before considering you for an apartment or a job.
● This can be an issue if most or all of a couple’s accounts and bills were registered and paid under one spouse’s name. As a result, the other spouse may have a low credit score.
● Take steps to build your credit history so that you have more financial options. Anyone thinking of separating should seek legal advice as soon as they can.
The laws that apply to matters such as property division and spousal support depend on where you live. They also depend on whether you are married or in a common-law relationship. And if you are married, whether you are separating or getting a divorce.
Divorce Is Not The End
Divorce is both financially and emotionally a very stressful event in a family’s life. Many single mothers live in poverty as a result. Women who take control of their finances early in life have a better chance, financially, to weather these storms.
Don’t wait for a divorce to become financially empowered. Whether you are married or not, make it a priority to become finacially savvy.
Finally, divorce is not the end. It is the beginning of the chance of a new life. You get to decide what that would be.
An excellent resource, if you are either considering a divorce or advising clients going through one, is Lili Vasileff’s book Money & Divorce: The Essential Roadmap to Mastering Financial Decisions.
This article contains affiliate links. I may receive a commission for items purchased through them (at no addional cost to you).
Jennifer worked in banking and finance before pursuing a career as a freelance writer.
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