On the whole, people take a great comfort in permanence and regularity. No one gets married expecting to get divorced any more than they go to Egypt expecting to see the pyramids crumble into sand. Nevertheless, the pyramids are eroding and divorce rates have been increasing steadily.
Unfortunately, divorce rates are still expected to climb and they don't have the help of a pyramid restoration project to control the damage. When a divorce happens, it has a shattering effect on all areas of a person's life, including their financial stability. This article will look at how to get through a divorce while keeping your finances in the best possible shape. (For insight on divorce and retirement planning, see Getting A Divorce? Understand The Rules Of Dividing Plan Assets.)
Tutorial: Budgeting Basics
Divorce and Debt
One of the most difficult things about a divorce is deciding who gets what. Spouses both have a financial and emotional investment in everything from the house to the stamp collection they kept together. People in the process of divorce usually do not feel overly charitable toward their soon-to-be ex-spouse, so their main concern is that they get what they feel they deserve from the settlement. This is why couples often focus on who gets assets and how future income will be divided while overlooking debts and loans.
It's better to sort these things out quickly and cleanly to avoid having the lawyers step in and drag out the process considerably - which can be both financially and emotionally draining.
To avoid having your lawyers step in, you have to remember that continued litigation isn't easy on you or your pocketbook. Often couples who engage in prolonged court battles find that the objects of contention are often worth less than the emotional and financial strain of continuing to bark at each other via lawyers. For most people, some form of mediation would be ideal. That way it is not a case of one or the other having to be the bigger person or both people fighting tooth and nail, but rather a process of agreement reached under the supervision of an impartial third party.
In many cases, mediation can save divorcing couples a lot of money. Case in point, when it comes to your residence, you are usually better off (emotionally and financially) selling it and splitting the cash. With investments however, it is advantageous if you can sign them over rather than liquidating them and passing on the cash. If you are forced to sell shared investments by court order, you will lose money in fees and taxes. Instead, it is better if you and your spouse can agree through mediation to sign over portions of the portfolio. This way you can avoid the fees and any tax burdens that come with selling. (Determine how assets will be divided before you get married with a prenuptial agreement. Learn more about them in Marriage, Divorce And The Dotted Line.)
The Aftermath of a Divorce
The unhappy fact is that, once the terms of your divorce are settled, you will be poorer than you were during your marriage. The upside is that you will know exactly where you stand financially and what you need to do to get back on track
The first thing to do is to evaluate what is left and make sure that everything is truly finished. Make sure you:
- Cancel any joint accounts.
- Cancel any joint credit cards.
- Change the terms of your life insurance and any other policies.
If you were the primary earner in the family, you will still take a hit financially through alimony. And even if you were not, you will still have less income than you did before.
Rebuilding After a Breakup
In most cases, both parties of a divorce have to work after a divorce just to make ends meet. Even if you were a dual-income couple, you no longer have the advantage of a single residence with shared costs. Every expense and utility becomes yours and yours alone. The best survival method is to downsize your lifestyle. For some, this merely means a smaller apartment or more modest vacations, but for many, and particularly for spouses who worked at home while their other half was the primary earner, this can involve a significant change.
This drop in lifestyle can be made more palatable if you have a basic plan to work yourself back up. You can no longer depend on anyone else to help organize your finances, so you will have to plan your budget, savings and investments by yourself. If you weren't the primary breadwinner, you have two challenges ahead of you: making up for lost income and rebuilding your credit. Although the credit you enjoyed as a couple may have been good, a divorce can potentially damage the individual credit of both parties. This is why most people find themselves renting for two or three years following a divorce. If you don't have a history of regular income and a decent credit rating, it is difficult to get a mortgage. (To find out how to get back on top of your finances, see The Beauty Of Budgeting, The Indiana Jones Guide to Getting Ahead and Mortgages: How Much Can You Afford?)
It is vital that you pay down any remaining debt from your marriage. Even if all the debts are settled, some couples come out of a marriage unable to qualify for a credit card. Fortunately, there are smaller types of consumer debt, store credit cards and simple loans that will help you to begin a new credit history. Paying them down diligently will have you back in the good books sooner than you may think. The important thing is that you do pay them down on time and, as soon as you can, move to better credit vehicles as your credit rating improves. (Keep reading about credit in The Importance of Your Credit Rating and Understanding Credit Card Interest.)
One of the few advantages to divorce is that you are able to alter your spending habits and lifestyle drastically. Take this time to bone up on personal finance and get your budget into shape. The more amicable you and your spouse's divorce settlement is, the less damage there will be to repair in your overall financial situation. As difficult as it is, the best way to keep your finances intact is to say goodbye to your relationship with the same grace as you started it with.