Divorce: Preparing Your Finances for Divorce
Divorce is one of the most emotionally and financially challenging experiences a person can go through. Beyond the emotional toll, it’s essential to get your finances in order before the legal proceedings begin to protect your assets and ensure a fair outcome. Preparing ahead of time will help you navigate the process with more confidence and reduce the stress of financial uncertainty.
Gather and Organize Financial Documents
The first step in preparing for divorce is gathering and organizing all relevant financial documents. This will give you and your attorney a clear picture of the marital assets, debts, and your overall financial situation. Key documents to collect include:
Bank Statements
Both individual and joint accounts.
Tax Returns
At least the past three years of tax filings.
Credit Card Statements
For both personal and joint accounts.
Investment Accounts
Stocks, bonds, retirement funds, and other investment portfolios.
Property Deeds
Including the family home, rental properties, and any other real estate holdings.
Loan Documents
Any outstanding loans, such as mortgages, car loans, or personal loans.
Having all of this information readily available helps ensure a smoother, faster divorce process and gives your legal team the information they need to advocate for you.
Separate Joint Accounts
Once you’ve decided to proceed with the divorce, it’s essential to separate any joint accounts to prevent financial entanglements. This includes:
Bank Accounts
Closing joint accounts and opening individual accounts in your own name.
Credit Cards
If you and your spouse share credit cards, notify the credit card company, and if necessary, freeze joint accounts to prevent any additional charges.
Taking these steps early can prevent unnecessary complications down the road and protect your financial stability during the divorce proceedings.
Assess Your Current Financial Standing
Before entering divorce negotiations, it’s important to have a clear understanding of your financial standing. Consider:
Income
Are you earning a regular income, or will the divorce affect your ability to work?
Expenses
Create a budget to account for future living expenses, including housing, utilities, insurance, and childcare.
Debts
Understand the debts you’ll be responsible for and whether those will be divided during the divorce.
With this information in hand, you can work with your legal team to ensure your financial needs are factored into the divorce settlement.
Consider the Tax Implications
Divorce can have significant tax consequences, so it’s important to understand how decisions made during the proceedings will affect your taxes:
Alimony
Spousal support is no longer tax-deductible for the payer or considered taxable income for the recipient in divorces finalized after 2018, but it’s still important to consider how this affects your overall financial picture.
Filing Status
Divorce will change your tax filing status, which may impact deductions and tax rates.
Property Division
If you're selling a home or transferring assets, there could be capital gains tax implications.
A financial advisor or legal professional can help you navigate these tax implications to minimize any negative effects.
Protect Your Credit
Divorce can be a risk to your credit score if you don’t take proactive steps to protect it. Make sure to:
Monitor Your Credit
Keep an eye on your credit report throughout the divorce process to ensure no new debts are being added without your knowledge.
Close Joint Accounts
Make sure any joint credit accounts are closed, or at least frozen, to avoid responsibility for new charges.
Establish Your Own Credit
If you don’t have credit in your own name, now is the time to start. Open a credit card or apply for a loan in your name to begin building your independent credit history.
Taking these steps will help protect your financial future as you transition into the next phase of your life.
Conclusion
Divorce can be financially overwhelming, but with the right preparation, you can protect yourself and your assets. By gathering documents, separating accounts, and working with financial and legal professionals, you’ll set yourself up for a smoother, more secure outcome.