Youâll need to divide your assets.
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Going through a divorce can be complicated and frustrating. After all, thereâs a lot to untangle when you and your spouseâs livesâand financesâhave been entwined for some time. Add kids, and thereâs another layer of complexity (and emotion) to consider.
As you move forward with your divorce and begin to decouple your finances, some pressing issues are likely to demand your attention.
Key Points
- A divorce typically requires you to separate your finances; any digital assets also must be divided.
- Any joint debt, including a mortgage, needs to be refinanced into one name or paid off.
- Retirement accounts have special rules for dividing investment assets during a divorce.
Divorce and finances: Top considerations
There are dozens of matters to consider as you work through a divorce, including plenty of financial issues. Youâll need to decide how to handle:
Community vs. individual property
Among the first things to figure out are which assets are community property and which are individual property. A basic guideline is that anything acquired during the marriage could be considered community property, while anything you had before you were married may fall into the category of individual or separate property.
Common law
Most U.S. states are common law states, which acknowledge the distinction between individual and community property. In community property states, all property owned by a couple is considered both partiesâ regardless of when it was obtained. A court decides how community property is split during a divorce.
Depending on which state you live in, some assetsâsuch as a business, investments, or inheritanceâcould still be considered separate property even if they were acquired during the marriage. It all depends on state law and a judgeâs interpretation. Having the proper documentation and/or receipts can help streamline the process of determining whatâs yours and how you acquired it.
What to do with bank accounts
Even if you already have some separation in your finances, many couples have at least one joint bank account for shared bills and expenses.
- Create a list of all your shared and individual bank accounts. This will help you visualize everything (and youâll need it for the divorce settlement, anyway). Keep your individual accounts for now, and consider what to do about joint accounts.
- Open a bank account in your name. If you donât have a separate bank account, open one in your name. If you have a source of income, have it deposited into your separate account.
- If you have a friendly relationship, you can go to the bank together, close your joint accounts, and divide the money.
- If your relationship is antagonistic, you probably wonât be able to close any joint accounts until after the divorce settlement.
How to handle debt
How you approach debt depends on what youâre dealing with and whether your accounts are individual or separate. In general, debt in your name is considered yours, no matter who racked it up. If your soon-to-be ex has been using your credit card to run up bills, you might still be responsible for paying that debt later.
Each of you should get a copy of your credit report and review it, noting all the accounts, the balances, and whether the accounts are joint or individual.
Joint loans and credit cards:
- Decide whether you want to pay them off now or divide and conquer later.
- If one party is assuming the debt, it should be refinanced into that personâs name.
- Joint credit cards should be closed. Most credit card issuers will allow you to close joint accounts and pay them off over time, if necessary.
- If your ex is an authorized user, and itâs not a true joint account, you can remove them from the credit card without getting permission.
- In a contentious divorce, a judge may apportion the joint debt, noting each partyâs responsibility in the divorce decree. Until the debt is paid off or a creditor agrees to remove one person from the account, however, creditors see you both as equally responsible.
Mortgage debt:
- If one person is staying in your marital home, the mortgage needs to be refinanced and re-titled to reflect the new ownership. A nonworking spouse might have trouble doing so.
- If one partner is ordered to pay alimony, it could be considered income for a nonworking spouse, but they may still need to get a job to qualify for refinancing on their own. Note: For any divorce agreement post-2018, alimony is not considered taxable income to the receiver (nor a deduction for the payer). However, for mortgage qualification purposes, alimony income may be considered.
- Consider selling the home, paying off the mortgage, and dividing the proceeds. Each of you can then use your portion for a down payment on another home.
- It might be possible for you both to remain on the mortgage until the home is paid off. Youâll need a co-ownership agreement and to be on good terms for it to work.
Dividing investment and retirement accounts
Separating investment accounts can be complicated, depending on how theyâre set up:
Tapping into your former spouseâs Social Security benefits
- Joint accounts. You could liquidate the accounts and divide the assets according to a formula or each partnerâs risk tolerance. Just make sure you understand the tax consequences. You may have to split the capital gains taxes later.
- Individual accounts. In general, you might each keep your individual accounts, but if one spouse has a higher income, it may not be your decision alone. A judge might require someone who was able to invest moreâwhile the other partner made less but took care of the house and children, for exampleâto share some of the assets from an individual account.
- Retirement accounts. If thereâs a big difference in income, a divorce settlement typically requires the higher-earning partnerâs retirement account to be divided. Known as a qualified domestic relations order, it specifies how the funds are split and transferred. The gender pay gap and average longevity generally mean that women often get a portion of a husbandâs retirement assets.
Dealing with digital assets
In todayâs world, you may share more than just traditional financial accounts and arrangements with your partner. You probably have accounts for music, streaming media, and online retailers, and you need to figure out how youâre going to divide them up.
Prenups are meant for the rich and famous, right? Not necessarily.
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Perhaps youâve built an extensive music library using Apple Music. A decision may be made about who gets to keep those digital tunes or whether they need to be parceled out, which may involve one spouse buying some songs from the other.
Maybe one of you uses the Amazon account more, so you let your spouse keep it. But now you need to set up your own separate Amazon account. The same goes for streaming services like Netflix or Disney+. And then thereâs your cell phone plan. Do you need to get a new plan on your own? Or are you on good enough terms to keep your family plan and have one ex-spouse pay the other for their portion of the bill each month?
When crafting your divorce settlement, be sure to spell out who gets what digital accounts and assets. And change the passwords on the accounts youâre keeping as soon as possible.
If you have kids, youâll need to figure out custody and child support arrangements (or have the state do it for you). But you must also decide whoâs paying for child-rearing expenses, including health care coverage, activities, hobbies, and of course food. You might:
- Split costs 50-50 after child support and other items are factored in.
- Split costs according to proportional income. One spouse might pay 70%, while the other pays 30%, depending on how incomes compare.
If the spouses canât agree about how to foot the cost of activities, it might fall on the one whoâs most passionate about piano lessons, for example, to suck it up and cover the full cost.
One final consideration, now and/or in the future: college costs. If you have a 529 plan or other savings earmarked for the kidsâ education, youâll need to decide who will manage each account until itâs time to use it. And how do you and your ex-spouse plan to pay for college when the time comes? Itâs best to set expectations now, both with each other and with the children.
One of your best options is to get professional financial and legal help.
- If things are amicable, sitting down with a financial advisor and a mediator to hammer out details might suffice. Once an agreement is made, you both sign it, file the paperwork with the state, and move on.
- In an antagonistic situation, you both hire attorneys who communicate between themselves. Make sure your lawyer knows whatâs important to you and where you can be flexible.
- If youâre escaping abuse, you may need or want to call around to get several lawyersâ opinions to find the best representation for your situation. Consider building up a separate emergency fund, making arrangements in secret if you can, and getting support from your network or a social services agency before you make your move.
If you or someone you know is experiencing domestic violence, call the National Domestic Violence Hotline at 800-799-7233. Available 24 hours a day, seven days a week.
This article was most recently revised and updated by Miranda MarquitThis article was most recently revised and updated by David Schepp
