Personal Finance

How To Recover Financially After A Divorce

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

Divorce is terrible regardless of how you feel about the marriage ending. Divorce may be a time-consuming and costly procedure depending on the number of marital assets and the spouse’s financial management style throughout the marriage.

Because no two marriages are the same and state laws regarding divorce can be quite diverse, there is no universally applicable method for ensuring a stress-free divorce. 

However, there are several frequent monetary blunders you may avoid during and after a divorce. If you can avoid making these fiscal blunders after getting a divorce, you’ll be in better shape to start over and rebuild your life quickly.

Money Mistakes to Avoid Following a Divorce

  1. Not establishing a post-separation budget

Even if you were the sole breadwinner before the divorce, your financial circumstances will alter. It is a grave error to fail to update your budget to account for the shift in your financial circumstances. You’re curious about the incoming and outgoing traffic. You could also be interested in making some changes to your way of life to accommodate your new circumstances.

A spending plan that takes into account one’s income and necessary costs is called a budget. A budget shows you where your money is going and if you need to make changes in either your income or your spending habits.

It is important to create a budget after a divorce to help you get back on your feet financially. If you are seeking spousal support, a budget will demonstrate to the court that your costs exceed your income.

Divorce doesn’t have to be a barrier to making a budget. Either manually or with the help of a program like Tiller or Personal Capital, here’s what you need to know:

  • Add up all of your earnings. When you’re just starting off as a single individual, it’s important to add up all of your money. You should plan for alimony and child support payments if you expect to receive them. It’s best to hold off on filing for support until you know for sure whether or not the court will order payment.
  • Sum up all of your outlays. Create an itemized budget that includes your mortgage/rent, utilities, debt payments, transportation, and food costs, among others. You can estimate your monthly expenses for things like meals and transportation by looking back at receipts or bank and credit card statements from previous months.
  • Take your income and deduct your expenses. After you have an estimate for your monthly expenses and income, you may calculate whether or not you have enough money to meet those charges. In that case, you should consider how you might save money or increase your income. Moving to a cheaper area, taking public transit instead of a car, or asking for financial help from an ex-spouse are all common solutions.

A post-divorce budget can help you assess your financial situation and make quick decisions about how to go with your life. If you were just working part-time before marriage, you could decide to go back to school, seek a raise, or take on more hours at work.

  1. Using Retirement Funds to Help Cover Living Expenses

Divorce is expensive, leaving many individuals scrambling for immediate cash. The precise cost of a divorce varies depending on the divorce attorney you pick, where you reside, and how long the procedure takes.

People often turn to their retirement accounts like IRAs and 401(k)s when they need a quick infusion of cash (k). However, borrowing from or withdrawing from your retirement account is a terrible idea.

When you withdraw funds from a retirement account, those funds stop contributing to your retirement savings. There is no interest accruing. Unfortunately for your future finances, you won’t be able to recoup the interest you lost during those months even if you put the same amount back afterwards.

There may be tax consequences if you take money out of your retirement account before you need it. Withdrawals are subject to income tax and a 10% penalty tax.

In addition, if you take a loan out of your 401(k) and then move employment, you may have to repay the entire debt at once.

Although it may seem like a smart idea at the time, withdrawing money from your retirement account to help you get by after a divorce is more likely to cause problems than to solve them.

  1. Failure to Purchase Life Insurance

If you or your ex-spouse are paying or receiving spousal support or child support, you should consider purchasing life insurance. If you have children that you are supporting, it is important to have life insurance in case you pass away and leave them in financial hardship. 

Make sure your ex-spouse has a policy if you’re getting support so that you won’t be left without a source of much-needed money in the case of their untimely demise.

When the court directs a parent to pay the other parent child support or a spouse to pay the other parent alimony, the paying parent may be obliged to purchase life insurance. Consult an attorney if you are confused about the terms of your settlement. Ten years ago, getting life insurance was a lot more difficult than it is now. Companies like Ladder make it possible to apply in as little as five minutes and get a response right away.

If you have kids, it’s smart to have coverage even if you’re not getting or paying child support. You and your ex-spouse should both carry life insurance policies if you share custody. The policy’s payout in the event of a parent’s death will assist make up for diminished financial support.

If your ex-spouse was named as the policy’s beneficiary before the divorce, you should remove them. If you have kids, they should be named as beneficiaries or a trust should be established for them.

Getting a life insurance policy may not be necessary right now if you and your ex did not have children together and you do not have any other dependents.

  1. Accepting Your Ex’s Demands

Ideally, you should wait at least a month after finalizing your divorce before contacting your ex-spouse. It’s difficult to enforce a no-contact order when you have kids in common, but it’s not impossible.

Divorce is painful, but cutting connections with your ex might help you recover. If either party has second thoughts regarding the divorce decree’s monetary or property partition provisions, they might put off making any further demands or requests.

Some people who have been divorced continue to place unreasonable demands on their ex-spouses. Remember that the divorce is final. As stated in the divorce decree, you have no further financial obligations to your ex-spouse. If they approach you after the no-contact period to ask for money or try to negotiate terms that are already part of the settlement agreement, politely remind them that the no-contact rule applies.

  1. Ignoring Your Taxes

Your tax status will shift after a divorce. It’s likely that you’ll have to file your taxes as a single person even though you were married for most of the year. To determine your tax filing status, the Internal Revenue Service uses your marital status as of December 31. To that end, the Internal Revenue Service expects you to file as a single person or head of household if your divorce was finalized on December 31.

However, if your divorce wasn’t finalized until January 2, you must treat the previous year as though you were still married, even if you had already told your ex-spouse that things were over.

It’s important to remember that your capital gains exclusions will shift if you alter your filing status. For instance, if you and your partner are filing joint taxes, the first $500k in profits on the sale of your home will be exempt from capital gains tax. If you’re unmarried, you can exclude $250,000 rather than $500,000.

However, a divorce affects more than just your tax position. How much you owe or make for the year is also affected. If you and your ex-spouse sold property as part of the settlement, for instance, you will both have to pay taxes on the proceeds.

Although a smaller tax bill shouldn’t be the deciding factor in whether or not to seek a divorce, it is crucial to be aware of the financial implications of doing so. You may want to talk to a financial adviser about how your divorce may affect your taxes in case you end up with a larger tax bill come April.

  1. Maintaining Joint Accounts

Since you’re no longer legally married to your ex, you and your ex should have no further ties or obligations to each other outside those of parenthood. Those are financial instruments such as checking and savings accounts, credit cards, and loans. Get your ex removed as an authorized user from any credit cards you own. Do not give them access to your credit card if you want to avoid the possibility of their running up a large balance that will be your responsibility to settle.

The process of dividing up debts that were incurred while married becomes more complicated if the debts in question are joint ones, such as a personal loan or a car loan that was taken out in both names.

Your lender will not just agree to drop one of you from the account. Instead, you’ll need to refinance the loan into a single borrower’s name. It’s the same with a joint mortgage payment. You and your ex-spouse will need to refinance the loan so that only one of you is responsible for the mortgage payments if you did not sell the family home as part of the divorce.

As part of the settlement, you will likely divide the account balances and liquidate the bank accounts. When you decide to be divorced, you can divide the account’s funds then and there. You should do all in your power to prevent your ex from regaining possession of everything that is legally yours.

  1. Not Obtaining (and Keeping) All Required Paperwork

Your best ally throughout a divorce is documentation. The process of dividing property can go more smoothly if you keep records of your joint income and expenses, any joint purchases of property, and a complete accounting of all joint assets.

But when everything has settled down, you should keep all the papers even if you think you don’t need it. You never know when you might need an old paper that you’ve been meaning to KonMari since it no longer brings you joy. For instance, if a couple was married for over 10 years, both spouses may file for Social Security payments even if they later separate.

You may also provide the court with an accurate picture of your financial situation with the use of these papers. If you need to petition the court for a modification of your alimony or child support order in the future, you will need to provide supporting documentation.

  1. Taking Care of Yourself

Many people feel emotionally drained and in need of a pick-me-up when the divorce procedure is through. It’s easy to indulge in a bit too much self-care when you’re emotionally drained and at risk of making poor decisions.

Spending money on short-term gratifications like a manicure or a new pair of shoes is OK, but you should avoid anything that might have a significant impact on your financial situation. 

No need to go out and buy a whole new automobile or completely revamp your clothing right now. Without getting into debt or spending more than you can afford, you may demonstrate to your ex that you’re doing just well without them.

Bottom Line

After a divorce is finalized, it’s common to take stock of one’s life and wonder, “Now what?” in terms of one’s finances. As a single individual, it might be more difficult to make ends meet due to the influx of additional financial concerns you may have to deal with. It’s tempting to try to repair your personal financial problems by resorting to drastic measures, such as withdrawing money from your retirement fund or selling everything of value.

Keeping your calm is essential if you want to come out of a divorce with your money intact. Before making any major choices, you should find out as much as you can about the impact a divorce will have on your life. Consult your divorce attorney and a financial advisor or certified financial planner for guidance as you map out your financial future after the divorce.

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