Don’t Let Divorce Be Your Financial Downfall

248486898_b4640ac444_mDivorce is a life changing event that is sure to have an impact on everything from your emotions to your finances.

When it happened to me, transitioning from two incomes to one required budget and lifestyle adjustments on my part.

Everyone’s situation is going to be different, but most people will experience tightened budgets and possibly additional debt accrued throughout the divorce process.

Severing all financial ties as soon as possible makes the transition much easier for both you and your former spouse.

This also protects you from having your former spouse default on payments, go bankrupt, or purposely not make payments on joint debt. It’s better to sort these things out quickly versus dragging things on in court, which can be both financially and emotionally draining.

Prevent Collateral Damage

After spending years with someone else, parts of your life become entwined with your significant other; finances, belongings, and children, not to mention yourself.

That being said, when you know it’s time to part ways for whatever reason, you should begin planning to protect yourself from losing things that are rightfully yours and falling into a financial black hole.

Here are a few basic steps you can take to protect yourself and your financial future.

  • Cancel or reduce credit card limits. This practice is to reduce future liability. You never know how your ex will react after being told a divorce is looming. Some people, out of hurt and anger and often without much thought, go out and spend like there is no tomorrow. High balances on credit cards must be paid back one way or another. So, to protect yourself and a potentially angry ex, either close the accounts or reduce the spending limit. While cancelling accounts may impact your credit score it may be better than having to take on additional debt.
  • Don’t make any unnecessary major purchases. Resist the urge to “treat” yourself to expensive major purchases, like new cars, flat screen TVs, motorcycles, or expensive jewelry. When you finally do make the split you may not have the luxury of affording these items any longer, which could lead to late payments, repossession of the goods, and a major hit to your credit.
  • Stay in your home. Obviously if the situation is abusive or unbearable you should leave. If at all possible though, stay in the home. Doing this can strengthen your stand on custody and possibly your personal or marital property. Since the laws vary from state to state, talk to your attorney before making the decision to leave. For example: In order to file for a dissolution of marriage in California, residency requirements must be met for the court to accept the case.
  • Start saving money. If possible, wait awhile before filing for divorce, and start saving money. This will enable you to afford a security deposit and first month’s rent when the time comes to move out. Consider saving enough for a few months’ worth of household expenses.

Create a New Budget

Life will be different after divorce, especially financially. You will most likely go from two incomes to one and still be responsible for all of your expenses. Building a new post divorce budget can help to put expenses into perspective. You will be able to see if based on your current income you can afford to stay in the marital home or have to move out and rent. If a car is essential to your lifestyle, can you afford to keep the one you have or will you need to find a less expensive set of wheels.

In order to build a budget, you’ll need to know a few things about the current state of your finances.

  • Gather information. Checking registers, credit card receipts, bank statements, payroll stubs, investment records, utility bills, insurance premiums, and tax information.
  • Organize the gathered information. Put all of you income and expenses on paper, a spreadsheet, or a budgeting program so you can see the bigger picture.
  • Make lifestyle changes.  You may have become accustomed to a lifestyle that included a big house, new cars every two years, and weekly dinners out. Be prepared to downsize, simplify, and become frugal.

Taking Control of your Finances

When you share your life with someone there is usually a partner who takes on the majority of the finances. Paying bills, opening lines of credit, and bank accounts may be foreign to you. In fact, many people find they don’t even know what they have (financially speaking) – this is dangerous!

  • Develop your own credit profile. Having no credit is just as bad as having bad credit. So if you don’t have any credit of your own, apply for some and manage it wisely.
  • Open your own bank accounts. If you have never balanced a checkbook there are many resources to help you learn how. Develop a bill paying system. If you have never paid bills before, this can be a daunting task.
  • Enhance your income. Depending on your situation this may be a way for you to get ahead more quickly. By taking on a part-time job, freelancing, or moonlighting you may be able to re-introduce the little luxuries once you get back on your feet.

Managing Debt (even if it’s your ex’s)

Whether you are planning on getting a divorce, are going through one right now, or are living with debts from a previous divorce, there are several ways to avoid having to take on your ex’s debt. After all, did you want the $3,000 golf clubs or diamond tennis bracelet?

  • Take inventory. Go through all of your credit cards, including those for different stores, furniture, and electronics. Now see which accounts are in your name, your ex’s name, or both. Are you an authorized user on these accounts? Unlike users of a joint account, authorized users are not legally responsible for payment. You may find there are accounts without a balance, or ones you haven’t used since you opened them. Make sure you determine if you co-signed for the accounts, even though your ex may have been the one to open them. Should your ex be unable to make the payments, the liability usually falls on their spouse (yes, you) to pay off the debt. If you can’t close the accounts you may have to settle for freezing them, or transferring the balance to a different account in your name only until the balance is paid off.
  • Consider hardship plans as a possibility.  After thorough review of your finances, you may find there is a large debt load you are still responsible for. While the debt was manageable with your joint finances, you may find it overwhelming on your own. The best thing to do is attempt to communicate this with your creditors, explaining your situation. Some creditors may have hardship plans available.  A hardship plan may allow you to pay back the debt on a revised payment plan, including interest-only payments for 3 to 6 months, based on the nature of the hardship. It is important to understand that while you may only be paying the accruing interest; your principal balance remains intact and is still owed.
  • Seek help if you need it. If you’re struggling to pay your bills and meet your other financial obligations, a debt relief plan might be one way to help alleviate your overall budget and make paying all your bills more affordable. Debt relief providers attempt to negotiate better repayment terms and help lower interest rates and fee., A debt relief plan can help you negotiate better terms for your other unsecured debt (credit cards, store cards, etc..) and combine those debts, into one affordable payment.

The fact is that, once your divorce is settled, you will statistically have less than when you were married. The good news is that you will know exactly where you stand financially and what you need to do to get your financial house in order.

Were you able to escape your divorce without financial ruin?

*This article is not intended to be, and is not, legal advice. Always consult a personal attorney for issues pertaining to your divorce.*

 

Suzanne CramerAbout the author:

Suzanne is a Certified Personal Finance Counselor® and previously worked as a Social Media Specialist for CareOne Services, Inc. And she writes for A Straight Talk on Debt. Suzanne is a divorced, single mom living in Pennsylvania.