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How To Start Preparing Your Personal Finances for Divorce

posted by admin 3:04 PM
Monday, August 29, 2011

“A journey of a thousand miles begins with a single step.”

When the Chinese philosopher Lao-tzu said that nearly 3,000 years ago, he certainly wasn’t talking specifically about divorce – and yet, his words of wisdom do apply.

Divorce is a journey, of sorts. And, even though the mere thought of divorcing your husband may seem completely overwhelming at first, you do have to engage in the process. You have to take the initiative. You have to begin with that all-important first step.

As a Divorce Financial Strategist(TM), my advice is that you start this “journey” by getting a handle on your personal finances.  With just a few relatively simple steps, you can be on your way to establishing a firm financial foundation, one that will serve you well as you proceed through the divorce and long into the future, too.

For example, in order to start preparing your personal finances for divorce you need to:

1. Take inventory of all financial documents and records. Gather all your financial records, including bank account information, mortgage statements, credit card bills, wills, trusts, etc. (See more details in our Divorce Financial Checklist.) Once you have collected them, don’t keep these records in your home. Make copies, and take them to a trusted friend/family member, or use a safe deposit box that your husband can’t access.

2. Begin securing funds for legal and other professional fees. You’ll need resources to hire a qualified divorce team.   If your husband controls all access to the family funds, he can make this difficult (if not impossible). Choking off the money supply is a common tactic, but there’s no reason you have to fall victim to this kind of financial squeeze. Be proactive instead. Make sure you have funds that are secure and available only to you.

3. Open new accounts in your name. Your divorce attorney may instruct you to withdraw up to half of your joint funds and deposit them in new accounts.  (State laws will dictate what you can and cannot do.) Don’t use the bank where you have your joint accounts. Go to a different bank, and open a new checking and savings account in your name. Moving forward as a single woman will require that you establish good credit, so open a new credit card account in your name, as well. Keep in mind, though, that new federal regulations are making it harder than ever for women with little or no income to establish credit on their own. You’ll have to proceed with caution . . . just make sure you do proceed.

4. Get a copy of your credit report. While gathering your financial records (Step 1), be sure to get a copy of your credit report, too.   Monitor it so you can keep tabs on your credit score. (See my post, How To Protect Your Credit Score During Your Divorce, for more tips.) Plus, if you keep a watchful eye on your credit report, you’ll also be the first to know of any unusual activity. Is your husband charging gifts for his girlfriend on your joint credit cards? Or is he dissipating marital assets in some other way?

5. Open a post office box. You need your mail delivered to a secure, locked box that only you can access. Make sure you use this address to receive correspondence from your divorce team, your new accounts, etc.

6. Change your will, medical directives/living will, etc. Most states won’ t allow you to completely disinherit your husband until after the divorce is final. But, you can take steps to prevent him from making medical decisions on your behalf or inheriting all of your assets should you die before the divorce settlement agreement is signed. Remember, you’ll also want to change beneficiaries on life insurance policies, IRAs, etc.

Once you have completed these initial steps, you will be on your way towards a new and secure financial future. Take it step by step, and you’ll start feeling less overwhelmed, more knowledgeable and better equipped to continue on your journey to a single life.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

 

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How is Debt Divided in Divorce?

posted by admin 12:08 PM
Wednesday, July 20, 2011

Everyone seems to understand that divorce involves the division of marital property and assets.

However, over the years, I have found that many people fail to fully appreciate that divorce involves the division of debt, as well.

Ironically, debt is typically cited as one of the top reasons couples split up. But, getting divorced doesn’t make those troublesome debt problems “magically” disappear. In fact, it’s exactly the opposite. Just as debt can often play a major role in the failure of a marriage, it can also play a major role in adding stress and contention to divorce proceedings.

What can you do minimize nasty debt headaches during your divorce? My best advice is to be prepared. Educate yourself about debt, in a broad sense. Then, gather all the relevant data about your specific case.  You’ll want to collect credit card bills, information from your mortgage/home equity/auto loan accounts, etc. and learn all you can about what you and your spouse owe.

In addition, here are a few tips to help you better understand how to handle dividing debt in your divorce:

1. Where you live impacts how debt will be divided. Divorce laws differ from state to state, and how your debt will be divided depends largely on where you live and whether you live in a Community Property State or an Equitable Distribution State.

There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples living in Alaska can “opt in” for community property, and Puerto Rico is a community property jurisdiction.

The remaining 41 states are known as Equitable Distribution States (or Common Law States).

(An earlier post discusses the differences between Community Property States and Equitable Distribution States in more detail.)

In general terms, if you live in an Equitable Distribution State, debt that’s incurred during a marriage is the joint responsibility of both parties, provided both parties are co-signers on the account (mortgage, credit card, etc.). In other words, if your husband opened a credit card account in his name only, then only he is responsible for that debt.

In Community Property States, both spouses are responsible, even if only one incurred the debt.

Of course, once you and your husband have separated, the rules change. Any debt incurred after you separate is the sole responsibility of the person who made the charges. The wrinkle here is that “the moment of separation” varies from state to state. In some states, you need to legally declare a separation. In others, a legal separation is not required; you’re separated once you start living apart.

2. It’s often best to eliminate shared debt. Our firm usually advises women to eliminate shared debt before the divorce is final. Naturally, that may mean you need to use marital assets to jointly pay off what you owe –but, usually that’s a worthwhile step, if it means you can begin your single life with a fresh start. Alternatively, some couples decide to divide and transfer their debts, so that each person is individually responsible only for his or her portion.

Either way, the goal is to separate your finances (and any remaining debt) from your husband’s finances (and any of his remaining debt).  As a result, you’ll remove your liability for what he owes.

If possible, you’ll also want to close joint credit cards and eliminate your husband as an authorized used on any credit cards in your name. Remember: Credit card companies and other third party agents are not bound by divorce agreements.  It may sound harsh, but if your names are both on a credit card account, the credit card company can hold you responsible if your ex rings up a balance and then decides not to pay.

One word of caution here:  New federal regulations are making it harder than ever for women with little or no income to establish credit on their own. You’ll need to proceed with caution as you set out to establish credit in your own name . . . Which brings up my third point . . .

3. Protect your credit. Once you have: a) established control of your own debt and b) separated your liability from your husband’s debt, it’s time to turn the page and begin a new chapter. You’ll need to establish credit in your own name –and then, once that credit is established, you’ll need to work hard to protect it. Start slowly and proceed with caution, keeping a careful watch on credit card balances, debit and ATM cards, etc.

A good first step should be to create a budget that will allow you to maintain your lifestyle, pay off any remaining debt and increase your savings. A divorce financial planner can help you determine how to manage your assets and which adjustments are necessary for continued financial stability.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

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It’s Critical to Understand How Debt is Divided in Divorce

posted by admin 10:00 AM
Wednesday, April 27, 2011

All joint debt acquired during the marriage will almost always be considered a joint obligation of both spouses. All debt that has both the husband and wife listed as co-signers such as car loans, mortgages, and credit card debt will also be the joint responsibility of both parties. However, if your husband has debt solely in his name, in most cases, your husband will be solely responsible for it and not you.

An exception to this is in Community Property states where both parties are typically responsible for any debt acquired during the marriage, even if that debt was incurred by just one of them. States with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska is an “opt-in” community property state, which means that both spouses must agree to be jointly responsible for all debt.

Once you are separated, any new debt incurred will be the sole responsibility of the person who incurred that debt. You need to keep careful records of your credit card charges after you are separated so that you can prove which are yours and which belongs to your husband. It is important to note that separation is not legally recognized in every state and those that do recognize it have their own guidelines for defining the date of separation, so please consult with your divorce attorney.

Joint debt, just like marital property should be negotiated and divided during the divorce process. Typically, the debt should follow the asset that is associated with that debt. So the car loan should become the responsibility of whomever gets the car and the credit card charge for the wide-screen television should become the responsibility of the person getting the TV, and so on.

It is important to remember that even though your divorce settlement agreement identifies who is responsible for each debt, your creditors don’t care about your divorce settlement agreement and will consider each spouse to be 100% responsible for any joint debt. So if your husband declares bankruptcy or defaults on any joint debt, those creditors will come after you for full payment, regardless of what your divorce agreement states.

To avoid this possible scenario, you may want to consider requiring that all debts be paid off prior to finalizing the divorce if there are sufficient assets to do so. To the extent possible, all loans, credit cards and other debts that were established jointly with your husband should be frozen and/or closed as soon as you know you are heading for divorce.

If you have debts that need to be addressed in any divorce settlement agreement, I highly recommend that you work with one of our Divorce Financial Strategists™ to help you resolve those issues and to protect your current and future credit rating.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. 
If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those
of the author, who is not an attorney.
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Protect Your Credit Score During Your Divorce

posted by admin 10:04 AM
Tuesday, February 15, 2011

If you are going through a divorce, you should immediately begin taking steps to protect your credit score. Your financial future depends on a good credit rating. Here are some tips for handling your finances during and after your divorce so that your credit score is protected.

Handling Joint Credit Cards and Other Debts

You should immediately order your credit report and find out exactly what debts you have.  In your credit report you will see all debts that belong to you and your spouse as well as the accounts that belong solely to you. You should closely monitor debts that your spouse has access to, such as credit cards, bank loans, mortgages and home equity lines of credit.  If you are concerned that your soon-to-be ex-spouse might borrow money in your name, you might want to sign up for a credit monitoring service.  These services will notify you anytime there is a change to your credit history.

It is important to note that even if your divorce settlement stipulates that your ex-husband is responsible for payment of certain debts, if he does not pay them or declares bankruptcy the creditors will come after you for payment!  The creditors don’t know and don’t care what your divorce settlement says. Because this was a debt that you both entered into, you’ll need to pay it if he can’t.  Therefore, you may want to include remedies in your divorce settlement to cover situations like this.  One way might be to make sure that joint assets are used to pay off all joint debt or have the property that is going to your ex-husband be placed in escrow until all debts are paid.

Close Joint Accounts If Possible

If possible, close all joint accounts. Most likely, you will only be able to close accounts that have a zero balance.  But, you should call all credit card companies, banks or other creditors to request that the account be closed.  Make it clear that you will not be responsible for any charges.  You should also follow up with a letter stating that you want the account closed.  Keep a copy of the letter as well as detailed notes of your phone conversations.  In both the phone conversation and the letter, ask that the lender report to the credit bureaus that the account was closed at your request.

Stay Current on All Joint Accounts

It is very important to make payments to all joint accounts on time even though you are going through a divorce. Unfortunately divorce negotiations can go on for a long time and not making payments or paying late can really hurt your credit score. Your credit rating will go down if a payment is late or missed entirely, even if your spouse is assuming the debt.

Freeze Accounts that Can’t Be Closed

If you find that you are not able to close an account due to an outstanding balance, request that a freeze be placed on your account.  This will prevent any further charges.  You will still be jointly responsible for the balance, but no further debt can be added to the account.  Remember to document all details related to this call and write and mail a letter. (Talk to your divorce attorney if your husband is using joint credit cards or other marital assets to travel with and/or buy gifts for his mistress.  There is something called dissipation of marital assets and if this is something that your husband is doing, your divorce attorney will need to make that part of any discussions/negotiations).

Close Joint Bank Accounts

Most couples have a joint checking and savings accounts.  These need to be closed as soon as possible, however you should talk to your lawyer before withdrawing money or closing your account since each state has rules about this. You will want to open a new account for yourself as soon as possible.

If you have questions about how you can protect your finances and credit, please feel free to contact one of our Divorce Financial Strategists™ here at Bedrock Divorce Advisors.

All content on this site/blog is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.

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