Preparing & Protecting Your Divorce Finances in Colorado
It’s important to note that each divorce situation is unique. Not all steps outlined here may apply to your specific case.
Pre-divorce: Financial Preparation
Gather and organize financial information and documents
Prepare a comprehensive checklist for divorce financial preparation, including all your assets, debts, expenses, insurance contracts, financial statements, pensions, retirement accounts, antiques, and almost everything with a financial value. These items will need to be divided or shared between the separating partners during the divorce process.
Here is a brief list of data to gather:
- Income documentation, including salaries, rental income, royalties, dividends, lotteries, and any other source of income
- Cash details
- Bank accounts and savings
- Stocks, bonds, and other investments
- Retirement and pension accounts
- Jewelry and antiques
- Vehicles, including boats, private aircraft, etc.
- Insurance policies for properties and life
- Business assets
- Wills and trusts
- Security deposits paid for properties or assets
During a divorce, both income and debts get divided. Debts can include:
- Credit cards
- Loans, including personal loans, student loans, and vehicle loan
- Rent obligations
- Tax debts and liens
- Property liens
- Any other debt acquired by any of the separating partners after marriage
- Pending lawsuits
Managing Joint Accounts and Loans in Divorce
Reviewing and managing joint accounts and loans is important to ensure a smooth transition to financial independence during a divorce. Here are the steps to take:
1. Address Joint Accounts. If you have joint bank or retirement accounts, consider closing them or updating the account ownership. Open individual accounts for your own financial transactions, including paycheck deposits and retirement savings.
2. Update Bill Responsibility. If you’re moving out of the marital home, remove your name from household bills, such as utilities, subscriptions, and memberships. If you’re staying, update the bills to reflect your sole responsibility.
3. Handle Shared Debts and Mortgages. Assess any shared debts or mortgages and decide on a course of action. If possible, paying off debts is the safest route. If that’s not feasible, consider refinancing options to separate financial obligations.
Taking these steps helps to clearly define each party’s financial responsibilities during and after the divorce process.
Take inventory of Assets and liabilities in Divorce
It’s necessary to inventory marital and non-marital assets and liabilities as you go through the divorce process.
1. Identify Marital Assets and Liabilities.
Marital assets and liabilities include items acquired or debts incurred during the marriage, regardless of whether they are owned jointly or individually. Create a detailed list of these assets and debts, and discuss how they will be divided or managed with your ex-spouse.
2. Understand Non-Marital Assets and Liabilities.
Non-marital assets and liabilities are those that belong solely to you and are not subject to division in the divorce. Even though your spouse has no claim to these items, it’s important to be aware of what you own and owe for your financial well-being.
During Divorce: Protect Your Finances
Avoid Major Financial Decisions During a Divorce
During a divorce, it’s essential to exercise caution when it comes to major financial decisions.
Here are some key reasons to be mindful:
Divorce can create unpredictability about your future income and expenses.
Divorce-related stress might cloud your judgment, leading to less rational choices.
Making significant purchases during divorce can complicate the division of assets.
Courts could view large expenditures as an attempt to dissipate marital assets.
Impact on Credit
Taking on new debt during a divorce may negatively affect your credit score.
Future Financial Planning
Major financial choices now can impact your long-term goals and retirement plans
Adjusting your budget to new living arrangements post-divorce may require careful consideration
Wait for the finalization of financial settlements, as they may affect your ability to afford or finance major purchases.
Given these factors, it’s wise to take a measured approach to financial decisions during the divorce process. Careful planning will help you establish a solid financial foundation for the future.
Update beneficiaries and insurance policies
As you go through the divorce process, look at the beneficiaries listed on your various accounts and insurance policies.
Here are the steps to consider:
1. Review Beneficiaries.
Go through your financial accounts, savings, retirement plans, life insurance policies, and other assets requiring designated beneficiaries. Check who is currently listed as the beneficiary.
2. Make Changes.
If your spouse is listed as a beneficiary on any of these assets, consider updating the designation to reflect your new circumstances. You may want to name a different family member, friend, or trust as the new beneficiary.
3. Revisit Your Will.
If you have a will or estate plan, review it to ensure that it still aligns with your wishes. If your spouse is named as a beneficiary or executor, you may need to make revisions to reflect your new situation.
4. Insurance Policy Updates.
Review your insurance policies, including life, health, and property insurance. Determine if any changes are needed, such as removing your spouse from a policy or adjusting coverage levels.
5. Seek Professional Guidance.
Making these changes can be complex, and the implications can vary based on individual circumstances. Consider consulting a certified divorce financial analyst or estate planning attorney to guide you through the process and ensure your updates align with your goals.
Post-Divorce – Establish Financial Independence
Build your credit
Your credit score plays a crucial role in your ability to secure loans for essential purchases post-divorce. Here’s how to build and protect your credit:
1. Check Your Credit Score.
Start by checking your FICO credit score to understand your current creditworthiness. Knowing where you stand will help you take the right steps to improve your score if needed.
2. Improve Your Credit.
If your credit score could use a boost, consider credit-builder loans or secured loans designed to improve credit scores. Additionally, rent-reporting services can add positive payment history to your credit report.
3. Manage Credit Utilization.
Keep your credit utilization rate low by using only a small portion of your available credit. This can positively impact your credit score.
4. Avoid Impulse Spending.
Be mindful of emotional or revenge shopping, which can lead to high credit card balances and hurt your credit score.
Monitor your credit
After divorce, keep an eye on your credit to safeguard your financial health.
Here’s how you can effectively monitor and protect your credit post-divorce:
1. Be Mindful of Joint Debt.
Joint debt, such as a mortgage or credit card, means both you and your ex-spouse are responsible for repayment. Your divorce decree does not bind your creditors, so missed or late payments can negatively impact both parties’ credit scores.
2. Close Joint Accounts.
Take action to pay off and close joint accounts to prevent future financial entanglements. If needed, consider selling assets to pay off debts or explore options like refinancing a mortgage into one person’s name.
3. Remove Ex-Spouse as Authorized User.
If your ex-spouse is an authorized user on any of your credit cards, remove them promptly to prevent unauthorized spending and protect your credit.
4. Update Information with Creditors.
Notify your creditors of your changed marital status. Request updates to your name and address, and clarify that you are not responsible for charges on closed joint accounts.
5. Check Your Credit Report Regularly.
Monitor your credit report frequently to spot any errors or discrepancies. Look for any unfamiliar accounts or activity, and promptly dispute any inaccuracies.
6. Maintain Good Credit Habits.
Continue making timely payments, keeping credit utilization low, and avoiding excessive debt to build and maintain a strong credit score.
Create a new budget
Establish a new budget after a divorce. Your financial landscape may have shifted, so adapting accordingly is important.
Here’s how you can create an effective budget post-divorce:
1. Assess Your Income. Start by listing your sources of income, including your salary, alimony, child support, investment income, and any other earnings. This gives you a clear picture of your total monthly income.
2. Itemize Your Expenses. Make a detailed list of your monthly expenses, including essentials like housing, utilities, groceries, transportation, and discretionary spending on entertainment, dining out, and hobbies.
3. Follow the 50-30-20 Rule. As a general guideline, aim to allocate 50% of your income to essential needs, 30% to wants, and 20% to savings and debt repayment. This balanced approach helps ensure you cover necessities while allowing for enjoyment and future financial security.
4. Adjust for Changes. Recognize that your expenses may have changed after a divorce. For example, housing costs might differ if you’ve moved or have new expenses like alimony payments. Adjust your budget accordingly.
5. Plan for Emergencies. Aim to build an emergency fund with at least six months’ worth of living expenses. This safety net can provide peace of mind and financial protection in case of unexpected events.
6. Evaluate and Adjust Regularly. Review your budget periodically to see if you’re staying on track. Make adjustments as needed to reflect changes in your financial situation or goals.
Rebuild your emergency fund
Life after divorce can bring unexpected financial challenges, and having a robust emergency fund is a key component of your financial safety net. Rebuilding your emergency fund ensures you’re equipped to handle emergencies and unforeseen expenses without derailing your financial stability.
Here’s how to go about it:
1. Set a Goal.
Determine how much you’d like to have in your emergency fund. A common recommendation is to save enough to cover at least six months’ worth of living expenses. Consider your unique circumstances and adjust the amount as needed.
2. Start Small.
If starting from scratch, don’t worry about reaching your goal immediately. Begin by setting aside a manageable amount each month, even if it’s just a small sum. Consistency is key to building your fund over time.
3. Automate Savings.
Set up automatic transfers from your checking account to a dedicated savings account for your emergency fund. Automating the process ensures regular contributions and reduces the temptation to spend the money elsewhere.
4. Keep It Accessible.
Your emergency fund should be kept in an account that’s easily accessible without penalties for withdrawals. Consider options like high-yield savings account to earn some interest while maintaining liquidity.
5. Monitor and Adjust.
Periodically review your emergency fund and make adjustments as needed. If your expenses change or you encounter a financial setback, reassess your goal and savings strategy.
We hope this information sheds light on the financial aspects of a divorce.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Consult with certified financial planners, divorce financial analysts, or attorneys.