In the United States, about 40-50 percent of marriages end in divorce.1 The good news is that the divorce rate as of late is decreasing, but it still impacts a number of households. Figuring out finances post-divorce can be stressful, but seeking out knowledge and taking the time to make a plan will help stabilize your life and guide you to a financially successful future.
A few key elements to consider when managing your finances post-divorce are:
- Shared Accounts
- Paying Off Debt
- Social Security
- Life Insurance
You will want to close any joint accounts. For shared savings accounts, creditors of any account holder can access those funds to settle debts owed by either party. So, while you may be paying all of your individual bills on time, if your ex-spouse isn’t, the creditors can still take from your shared savings. Also, both parties have access to the funds in the shared savings account and a spiteful ex-spouse may decide to clean it out and it’s technically theirs so you would be hard pressed to get any of it back. The best way to avoid problems is to close the account and divide the assets.
Linking your credit with another person’s credit always comes with pros and cons. Sharing responsibility for bills and helping build credit are benefits of joint credit accounts, but the downside comes when there is disagreement between the two account holders. Your ex-spouse may decide to run up the balance on a shared account and refuse to pay. Taking them to court just equals more expenses, so it’s best to quickly close the joint credit account before issues occur. If there is still a balance owed, contact the credit card company and change the account status so that no additional charges can be made. That at least will give you peace of mind knowing no mischief can occur while you figure out a payment plan.
If you have had the joint credit account for a number of years, the closing of it may cause your credit to take a hit. You are entitled to a free copy of your credit report every year, so take advantage of this and check yours post-divorce. If you had previously been relying on the joint account as your main source of credit, it’s important to start building your own credit history. NerdWallet has a helpful article about building a credit score from scratch.
Paying Off Debt
In the event of a divorce, contact your creditors if you feel you may have problems paying the bills on time. Divorce can cause financial strain and some credit card companies may be willing to work with consumers experiencing hardship and lower your payments temporarily. Be honest with your creditors and, if possible, record phone conversations you have to ensure you’re protected. If you aren’t able to record the conversation, write down the time and date you called, who you spoke to, and any promises the company made.
A big step in paying off any type of debt is to budget. List your assets and expenses. The post-divorce list will look very different than your budget during your marriage. You previously had two incomes and split costs like rent and energy bills. Review your list and see where you can make cuts to expenses. Do you need cable still? Can you take lunch to work instead of buying at the cafeteria every day?
If your split is amicable, figuring out how best to pay off remaining debt and bills can be low on the stress scale; however, oftentimes divorces are messy and this can affect how well repayment plans are managed. Keep in mind that even if you have a divorce decree that states how the payments should be made, creditors don’t know this and can still come after your assets if your ex-spouse doesn’t pay his/her half of any co-signed debt. You may need to work with a divorce attorney if you and your ex-spouse can’t agree on a fair payment plan.
If you were married for 10 years or longer you will be eligible to collect Social Security benefits based on your ex-spouse’s earning record when you reach retirement age – if you are not remarried to someone else at the time.2 Your ex-spouse remarrying doesn’t affect receiving benefits, only your status does. If you did remarry, that marriage must have ended as well in order to collect. At retirement age, you could then choose to collect on either spouse (assuming both lasted at least 10 years), but you can’t collect on both.3
If you had not been planning for retirement and had been relying on your spouse’s retirement plan to provide for you, it’s time to start planning ASAP. You may have received a share of your ex-spouse’s retirement funds in your divorce settlement but this may not be enough. Work with a financial planner to determine how much you may need to enjoy your retirement years.
Life insurance is an extremely important factor to consider during divorce, especially if you have children together. If you have a life insurance policy on yourself, you probably made your ex-spouse the beneficiary. If you now no longer want that person receiving the death benefit on your policy, changing your policy beneficiary is simple enough; whichever company you purchased life insurance through can help you with that. Contact Quotacy if you need any help changing a life insurance policy you purchased through us.
If your spouse owns a life insurance policy on you, policy ownership can be signed over to you during the divorce proceedings. Your attorney can help with this situation.
If you are to receive alimony or child support, then you should explore options to protect this income.4 After you are divorced, and your ex-spouse dies, this money will stop. One option is to set up a life insurance policy on your ex-spouse. You can either buy a brand-new policy or use an existing policy if the life insurance policy was purchased during your marriage. The policy should be large enough that it could replace the money you are expecting to receive in alimony and child support payments. A life insurance policy on your ex-spouse of course requires his/her consent. Also, depending on your situation, it might make more sense to pay the premiums yourself. This protects you from depending on the person you are no longer married to to keep the payments current. Missing payments can cause the policy to lapse, and the life insurance company could cancel the policy.
Going through a divorce can be an extremely stressful time, but it’s important to stay focused on making sure your financial future is bright. It’s wise to speak with your financial advisor and/or attorney so you do not have to navigate these sometimes complicated issues alone. Contact us here at Quotacy if you need assistance in purchasing life insurance or making changes to your current policy.
(1) Marriage & divorce, American Psychological Association
(2) Taking Control After a Divorce, Financial Life Focus, April 2015
(3) Social Security and Divorce: Can You Collect Benefits on Your Ex’s Earnings Record?, Charles Schwab, Carrie Schwab-Pomerantz, September 2014
(4) Life After Divorce, Protective Life Insurance