Decoupling Your Finances: How to Divide Your Money in a Divorce

A step-by-step guide to disentangling your finances

Financially speaking, divorces can be messy. Between state laws, beneficiaries, and dividing assets, disentangling your finances from your former spouse's can become incredibly complicated. If you find yourself needing to divide your money, follow these steps to cover your bases and recover your assets.

Key Takeaways

  • Depending on your state of residence, the law guiding how to divide assets could be community property or separate property.
  • Close joint bank accounts and, if you don’t already have one, open your own.
  • Get a copy of your credit report to identify all the credit cards and loans attached to both spouses. It’s a good idea to close any joint credit lines.
  • You’ll need to divide the assets you have in investment and retirement accounts, too. Retirement accounts have specific rules dictating how this is done.
  • If you and your ex own a home, you’ll have to decide who keeps it, or sell it and split the proceeds. If you get the house, and it has a mortgage that still needs to be paid off, you’ll need to refinance to have it in your name only.

Community vs. Separate Property

Your primary consideration is how your state views property ownership in a marriage. Depending on the state where you reside, the law guiding how to divide assets could be community property or separate property.

Community property includes any possessions gained during the marriage. In other words, both spouses equally own marital assets such as property acquired, income earned, and debts accrued while married.

Separate property allows a spouse to remain in control of their original assets. If you owned property before your marriage or bought assets with an inheritance, for example, you keep ownership of those items.

Below are the top 10 most expensive states for divorce:

Top 10 Most Expensive States for Divorce
State  Average Cost
1 California  $14,435
2 New York  $13,835
3 Texas  $12,792
4 Connecticut $12,360
5 New Jersey  $12,300
6 Massachusetts $12,200
7 Delaware  $12,165
8 Virginia  $11,584
9 Georgia  $11,400
10 Colorado $11,230

Bank Accounts

Most couples have at least one joint bank account, and handling these should be at the top of your list when untangling assets in a divorce. Start by creating a comprehensive list of all your accounts. For now, don't worry about whether they are jointly owned. You need to establish a record of every bank account in existence, then you can proceed with dividing the shared ones.

When you've completed your list, make a note of which are joint accounts. If you and your spouse are still friendly, visiting the bank together to close the accounts is a viable solution. It might be awkward, but it's actually the quickest way to dissolve the shared account.

Unfortunately, if you're not on good enough terms with your ex to plan a joint trip to the bank, it’s likely you won’t be able to close the account until the two of you reach a divorce settlement.

In the meantime, you'll want to open a new bank account exclusively for yourself, if you don't already have one.

When getting a divorce, establishing your own financial identity is critical. Opening your own bank account, if you don't already have one, is the first step.

Credit Cards and Loans

Not sure how many cards your soon-to-be-ex has? Maybe even forgotten a few of your own? Obtaining a copy of your credit report will help you identify all the credit cards and loans attached to both spouses. Investigate the accounts to determine whether you’re a joint owner or just an authorized user.

Keep in mind that having an independent credit history is of paramount importance, whether you’re married, getting a divorce, or single. Now is the time to apply for a credit card in only your name if you don’t already have one.

As for existing joint credit and loan accounts—for example, credit cards, personal loans, and car loans—you have three choices for handling each one:

  1. You can agree to pay them off now.
  2. You can agree to pay them off later.
  3. You can do nothing.

The most efficient option is to settle the balances immediately and close the accounts as soon as possible. This reduces the potential risk to your credit score of having a (probably not pleased) ex potentially forgetting to pay a bill or going on a spending spree.

If you agree to close the accounts now, even if you’re not paying them off, you’ll also lower the risk of impacting your credit. Credit card companies will often allow you to close the account to avoid the possibility of additional purchases increasing the balance.

Notice the options include the language “agree to.” In a divorce, it isn’t advisable to manage joint assets or accounts on your own. If both parties can’t agree on how to handle the credit cards and loans, you might be stuck with option number three: doing nothing.

Note that if you have a credit card in your own name—but on which your soon-to-be-ex is an authorized user—you don't need their permission to remove them. It's also wise to remove yourself as an authorized user on any of their credit cards so that you're no longer connected to them.

Investment and Retirement Accounts

Clarifying the division of investments isn’t as straightforward as credit cards and bank accounts. Knowing the exact details of each account is crucial before agreeing on how to allocate the funds.

For instance, the actual value could vary from the perceived value because investments often carry different levels of risk or have specific taxes and fees that apply. And there’s risk tolerance to consider, too. If you’re more conservative, it can make sense to let your spouse keep riskier investments.

Sometimes liquidation is the best option. Because transfer and withdrawal fees can be costly, be mindful of the charges that apply before you go this route. If you determine this is the best option, many experts recommend selling the investments first to share the potential tax burden of capital gains.

The division of retirement assets involves specific requirements depending on the type of account. Most plans and accounts have rules that must be followed when dividing retirement assets in a divorce. For example, a qualified domestic relations order (QDRO) is a court order used to divide specific types of retirement plans, including 401(k) and 403(b) plans. 

Your Home

If you and your soon-to-be-ex own a home, banks will not allow you to remove one spouse from the mortgage just because you’re getting a divorce. To get the home in your name only, the process requires you to refinance it. And qualifying on your own for the loan can be tough if you are a nonworking spouse. If you cannot be approved in just your name, the most viable option might be selling the home and dividing the proceeds.

Alternatively, you could leave both names on the house, though it’s a much more complicated solution that requires a co-ownership agreement as part of the divorce. If you're not on great terms with your former spouse, you may not want to continue carrying an enormous financial burden with them.

Seek Professional Help

At a time when your mind and emotions are likely a mess, don't take any risks with your finances. Be wary of well-meaning advice from friends and co-workers, and consult with professionals—such as an attorney and Certified Divorce Financial Analyst (CDFA)—on the proper way to disentangle your bank, investment, and credit accounts, as well as any other shared property you'll now need to divide. This is a crucial time to rely on professionals that help ensure you've checked every box, found every account, and have fully protected yourself from financial damage.

How Do I Separate My Finances in a Divorce?

Close any joint bank accounts. Open your own account if you don’t already have one. Check your credit report from the three main credit bureaus to identify all credit cards and loans that you share with your spouse. Close any joint credit lines. You’ll also need to divide the assets you have in investment and retirement accounts. If you own a home with your spouse, decide who keeps it, or sell it and split any proceeds. If the home has a mortgage and you want to keep it in your name only, you’ll need to refinance the loan.

What Is Community Property?

In states with community property laws, each spouse is considered to own a share of the marital assets, including any financial or real assets acquired during the marriage. Nine states have community property laws: California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin.

What Is a Qualified Domestic Relations Order (QDRO)?

A qualified domestic relations order (QDRO) is a court order used to divide the retirement assets located in employer-sponsored plans such as 401(k)s and 403(b)s. IRAs are divided using a process known as "transfer incident to divorce."

Article Sources
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  2. 24/7 Wall St. “This Is How Much It Costs to Get Divorced in Every State.”

  3. Internal Revenue Service. "Part 25, Chapter 18, Section 1: Basic Principles of Community Property Law."

  4. Internal Revenue Service. "Topic No. 412 Lump-Sum Distributions."