Re-establishing Your Financial Identity During Divorce

April 23, 2018

Many divorces start out rather amicable. When two people decide they will  “consciously uncouple,” there is often a high level of trust as they begin to unwind their lives. However, once you make this decision the process can still take a while. Depending on where you live an uncontested divorce can take from 2 days up to 18 months. In other cases, it may be to your advantage to end the year married for tax filing purposes. The tendency can be to postpone doing things like establishing separate accounts, refinancing the home, closing credit cards, etc. because with such momentous change on the horizon; why disturb the status quo? 

Things can change quickly

Then something happens, like one person gets into a new relationship, and things sour quickly. All those divorce nightmares you heard about can suddenly become a reality if you have financial exposure to someone that sees you as an adversary. This is why it makes sense to start limiting financial exposure as soon as possible once the divorce decision has been made.  

Here are some steps to take immediately and a few tips to consider after the divorce is final. Because there could be long-term legal ramifications to these decisions it would make sense to consult with a family law attorney along the way.  

What you should consider right away

Checking and savings

If all your accounts are owned jointly, you will need to establish new accounts. If you have accounts in your name only already in place then it may make sense to operate in those accounts going forward. You can choose to operate out of a joint account for joint expenses like mortgages and utilities (more on this in a moment) but keep in mind that you will be responsible for any account mismanagement, like overdrafts.  

Credit cards

If you have credit cards in your joint names the best practice is to either close or freeze these accounts. If you have separate accounts but your spouse has a card in their possession as an authorized user, it may make sense to close their card and have the number reissued.  

Your home

If you are in the divorce process and you have mutually agreed that the home would be too much for one of you to keep, go ahead and start the selling process. While that sale is in process it probably would make sense for one of you to stay in the home. That person would be responsible to keep the house staged for showing. It would be ideal to have some written agreement in place outlining how expenses for the residence will be split until a sale occurs or the divorce is final. 

Accounts with beneficiary designations  

Any account where you can change the beneficiary without a spouse’s consent should be updated immediately. Others, such as your retirement accounts, will have to wait until the divorce is final, depending on your state. Be sure to update any POD or TOD provisions on financial accounts and don’t forget any life insurance you have.

Cash flow

As soon as possible, readjust your budget for your new standard of living. This is the perfect time to lay out a spending plan that keeps you on track for your future goals.  

Once the divorce is complete

Beneficiary update part 2 

Now that you’re officially unmarried, make sure you update all accounts that required spousal permission. These are typically retirement related benefits like 401ks and pensions.  

Healthcare and other benefits

Reassess your benefits to make sure they are right fit for your newly constructed household. For instance, you may be in a situation where a lower or higher deductible would make better sense now that you are on your own. 

Estate planning 

Move forward with updating your estate plan for your new reality. Update who would serve as your executor for your estate and who would serve as power of attorney for finances and healthcare. If you have a trust, you’ll want to make sure your ex isn’t named as successor trustee, nor are any in-laws named. You may also need to update potential guardians for any minor children.

Mortgage 

If your spouse is keeping the house, be diligent in making sure the mortgage is refinanced with your name removed. Any mortgage delinquencies will also affect your credit, as my colleague learned the hard way. 

Revisit your spending plan 

Sometimes the financial terms of the separation can change at the last moment. You will need to update budget considering these changes. This is also a good time to review your plan with a financial planner.   

Retirement

Use a calculator to determine if you are still on track for retirement. Also contemplate how your social security benefits can be affected by your decisions going forward.  

Going through a divorce is emotionally and financially challenging. No matter what you’re feeling in the moment, it’s important to make decisions keeping your “5 years from now” self in mind, the person who will look back on this stressful time and sigh with relief. Do what you can to avoid also looking back and wondering, “what was I thinking??”