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How do I prepare financially for divorce?

If you are considering divorce, itís vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for.

The time taken to prepare and plan for eventualities will pay off later on. Here are some steps towards that end.

Making an inventory of your financial situation will help you to prepare in two ways:

  1. It will provide you with preliminary information for an eventual division of the property.

  2. It will help you to plan how the debts incurred in the marriage are to be paid off. (Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.)

First, make a list of all of your assets, joint or separate, including:

  • The current balance in all bank accounts
  • The value of any brokerage accounts
  • The value of investments, including any IRAs
  • Your residence(s)
  • Your autos
  • Your valuable antiques, jewelry, luxury items, collections, and furnishings

Next, make sure you have copies of the past two or three yearsí tax returns. These will come in handy later.

Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.

Find the papers relating to insuranceólife, health, auto, and homeownerísóand pension or other retirement benefits.

Next, list all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

Tip Tip: If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.

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How should we handle credit card accounts during a divorce?

First, it is important to cancel all joint accounts immediately once you know you are going to obtain a divorce.

Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the co-signer's irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

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What do I do if my current or former spouseís poor credit affects me?

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from your spouseís information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own. If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage, and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouseís credit record, not yours.

In practice, it is difficult to prove that the credit history under consideration doesnít reflect your own, and you may have to be persistent.

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What happens to my credit history after a divorce?

If a woman divorces, and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply. (The account remains open.)

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Further, should you need credit in an emergency, it will be available.

Do not use only your husband's nameóe.g., Mrs. John Wilson--for credit purposes.

Tip Tip:Check your credit report if you haven't done so recently. Make sure the accounts you share are being reported in your name as well as your spouse's. If not, and you want to use your spouse's credit history to build your own, write to the creditor and request the account be reported in both names.

Also, determine if there is any inaccurate or incomplete information in your file. If so, write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband's accounts, building your own credit history in your name should be fairly easy. Call a major credit bureau and request a copy of your file. Contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

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What are the legal issues that must be faced in most divorces?

The best way to plan for the legal issues that must be faced in a divorceóchild custody, division of property, and alimony or support paymentsóis to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solutionóeither one worked out between the two attorneys or one worked out by a courtówill be drastically reduced.

Here are some generally tips for handling the legal aspects of a divorce:

  • Get your own attorney if there are significant issues dealing with assets, child custody, or alimony.

  • Some ways of finding a good matrimonial attorney include referrals from another professional, referrals from trusted friends, or lists obtained from the American Academy of Matrimonial Lawyers. (The address of the latter organization is listed in the last section of this Guide.)

  • Make sure the divorce decree or agreement covers all types of insurance coverageólife, health, and auto.

  • Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.

  • Donít forget to update your will.
Tip Tip:Those who have trouble arriving at an equitable agreementóand who do not require the services of an attorney--might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled "Divorce Assistance," or "Lawyer Alternatives.

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How does property get divided in a divorce?

The laws governing division of property between ex-spouses vary from state to state. Further, matrimonial judges have a great deal of latitude in applying those laws.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney.

  1. Gain an understanding of how your stateís laws on property division work.

  2. If you owned property separately during the marriage, be sure you have the papers to prove that itís been kept separate.

  3. Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school, or your non-financial contributions to his or her financial success.

  4. If you need alimony or child support, be ready to document your need for it.

If you have not worked outside the home during the marriage, consider having the divorce decree provide for money for you to be trained or educated.

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What are the tax implications of divorce?

After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:

Child Support

Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).

Alimony

Alimony is deductible by the payer and is taxable to the recipient. Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treated is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.

Property Settlements

Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.

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What happens when retirement plans or IRAs are divided up in a divorce?

Generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.

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Can I deduct the cost of getting a divorce?

Generally, no. However, fees paid specifically for income or estate tax advice pursuant to a divorce may be deductible. Also fees made to determine the amount of alimony or to collect alimony can be deducted. These deductions would be miscellaneous itemized deductions subject to the 2% limitation.

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Who is entitled to deduct the dependency exemption of a child after divorce?

Generally, the custodial parent is entitled to the deduction. However, this is often negotiated in the divorce settlement. If the parents agree in writing, the non-custodial parent can take the deduction.

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