The financial challenges of divorceJason Alderman, who Visa's financial education programs, offers some important financial issues to consider when you separate.
By: Jason Alderman, Pine Journal
Even in a strong economy, divorce is often difficult and costly; but in a prolonged recession, it can be financially devastating. For example, suppose that:
Neither spouse can afford to buy out the other and you're forced to sell the house at a loss – or even go into foreclosure.
One of you has been unemployed for a prolonged period and you've run up major debt.
One or both of you have difficulty finding independent, affordable health insurance.
The retirement and investment accounts you've accumulated together and now must divide have lost significant value.
Even in an uncontested divorce, recovering from any of these scenarios would be difficult. But if your divorce is acrimonious, additional legal fees could leave you further in the hole.
Here are some important financial issues to consider when you separate:
Do-it-yourself divorce kits are widely available, but even couples with few assets who part amicably still need capable representation. That may mean hiring an attorney who specializes in divorce to at least review your paperwork and make sure you haven't overlooked anything you might later regret.
To avoid a conflict of interest, you should each have your own attorney. Ask friends for recommendations, including those who have recently divorced. Ask attorneys you know who specialize in other areas if they can recommend a good divorce attorney. Another resource is the American Bar Association (www.abanet.org under "Public Resources"), which has a state-by-state search engine for finding legal help.
You may also want to consult a financial planner for advice on how to fairly divide property whose value has escalated (or plummeted), calculate child support and ensure you're sufficiently insured, as well as explain Social Security and retirement plan implications.
A good financial planner could save you money in the long run by helping to avoid prolonged court battles and mapping out a plan for future financial security. If you don't know one, good resources are the Financial Planning Association (www.fpaforfinancialplanning.org) and the Institute for Divorce Financial Analysts (https://www.institutedfa.com.)
To protect your credit status, close joint bank or credit card accounts and open new ones in your own name; otherwise, an economically struggling or vindictive ex-spouse could amass debt in your name and ruin your credit. Be sure all closed accounts are paid off, even if you must transfer balances to your new account and pay them yourself. That's because late or unmade payments by either party on a joint account – open or closed – will damage both of your credit scores.
Check your credit reports before, during and after the divorce to make sure you're aware of all outstanding debts and to ensure that all joint accounts were properly closed. The three major credit bureaus, Equifax, Experian and TransUnion, don't always list the same accounts, so to be safe, order reports from each. You can order one free credit report annually from each through www.annualcreditreport.com or more frequently for a small fee from each bureau.
For additional financial considerations related to divorce, visit Practical Money Skills for Life, Visa Inc's free personal financial management site at www.practicalmoneyskills.com/divorce.
Don't get caught up in the emotional turmoil of divorce and forget to protect your future financial interests.
Jason Alderman directs Visa's financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney