Breaking Up is Hard to Do: 10 Ways to Protect Your Finances in Divorce

Protecting your finances while navigating the emotional minefield of divorce is one of the toughest things you'll ever do. And one of the most important.

Useful resources

Divorce can have a devastating financial effect on men and women—but typically women bear the brunt of the pain. In the first year after a divorce, a woman's standard of living typically plunges 30% to 45%, according to the U.S. Labor Department. Women who stay home to raise their children pay an especially high price when a marriage ends.

Couples contemplating divorce often underestimate the cost of maintaining two households—mortgage payments, insurance, rent, utilities, and cars. Here's a reality check. A couple with a combined income of $90,000 a year will have to cut living expenses in half when they divorce. Over the next 20 years they will sacrifice a combined net worth of more than $500,000, according to a Purdue University study.

If you're getting divorced, here are some ways to protect your financial security.

Act quickly to protect your assets.

Keep the lid on legal fees.

Use a mediator to find common ground.

Know your state's child support guidelines.

Know the difference between alimony and child support.

Get your fair share of your retirement nest egg.

Gather all financial and property records.

Nail down insurance coverage.

Get help with your finances.

Set a realistic housing budget.

1. Act quickly to protect your assets.
Alert your credit union, bank, brokerage firm, or mutual fund broker of the situation. They may agree not to make transactions on joint accounts without your approval.

You're entitled to a share of the retirement benefits or pension earned during your marriage.

Immediately establish credit in your own name if you don't already have it. Limit your liability by closing joint credit card accounts as soon as a divorce is pending. Be aware that a divorce decree doesn't protect you from potential liability if your ex doesn't pay his or her share of an outstanding balance.

Revise your estate plan, power of attorney, and health-care proxy documents.

2. Keep the lid on legal fees.
Rule No. 1: Don't use your attorney to get back at your ex.

In the first year after a divorce, a woman's standard of living typically plunges 30% to 45%.

"Keep in mind that anger can cost you an awful lot of money," says Charles Shainberg, president of the Chicago-based American Association of Matrimonial Lawyers. "A divorce these days is really an economic issue. Most people cannot afford to pay for vengeance."

Understand that the meter is running every time you call your attorney. Don't waste your time venting emotional issues or sharing the latest outrage.

Finding a lawyer requires your careful attention. Referrals from friends are best, but if you don't know anyone, contact the American Academy of Matrimonial Lawyers or the American Bar Association.

3. Use a mediator to find common ground.
Many divorcing couples seek the services of a mediator to reconcile issues of custody, property, and support. Often people use mediators but still will have an attorney finalize and approve the divorce agreement. Working with a mediator generally is less expensive than having lawyers battle it out.

The American Academy of Family Mediators and http://www.mediate.com can help you find a mediator in your area.

4. Know your state's child support guidelines.
Generally, the amount of child support you will receive depends on state guidelines. More than 30 states use a model based on the income of both parents. Courts can depart from state guidelines to cover certain expenses such as child care, special needs, recreational activities, and medical expenses. Visit http://www.supportguidelines.com to review the laws in your state.

Extending child support to cover college expenses also differs from state to state.

If you're having trouble collecting support, contact your local child support enforcement agency. The National Child Support Enforcement Association Web site offers links to your state's office (see "Useful resources" below).

5. Know the difference between alimony and child support.
Only about 15% of divorces or separations involve alimony or maintenance payments. Alimony can be temporary or permanent. For example, a court may grant temporary alimony to a mother with young children who hasn't returned to the work force yet.

Understand that alimony is taxable for the recipient and deductible for the payer. Child support is tax neutral.

Immediately establish credit in your own name if you don't already have it.

6. Get your fair share of your retirement nest egg.
You're entitled to a share of the retirement benefits or pension earned during your marriage. A qualified domestic relations order (QDRO) is a court order that awards a share of a pension plan to a divorced spouse. Options include a one-time payment, monthly payments at retirement, or a lump-sum payment that you transfer into your own IRA. A free publication about QDRO is available here.

If you're 62 or older, were married at least 10 years, and haven't remarried, you are eligible for Social Security based on your ex-spouse's earnings.

7. Gather all financial and property records.
Obtain records of all credit union, bank, and brokerage accounts, insurance policies, retirement plans, tax returns, and other financial data. Develop a comprehensive list of all your property and assets, including furnishings, art objects, jewelry, and investments. Compiling these records is a good first step in any agreement regarding division of assets.

8. Nail down insurance coverage.
Obtain health insurance right away, either from your employer or by obtaining an individual policy. If you were covered under your spouse's group heath plan, coverage is available through COBRA (Consolidated Omnibus Budget Reconciliation Act) for 36 months—but it's expensive. Make sure you notify the plan administrator of your intention within 60 days of your divorce or legal separation.

Consider increasing your life and disability insurance, since you no longer have a second income to fall back on.

9. Get help with your finances.
You probably need to consult a financial planner with experience in divorce planning to review your finances and retirement plans. Many divorce attorneys don't have the expertise to evaluate investments or establish a tax-effective way to liquidate a portfolio.

The Financial Planning Association and the Institute for Certified Divorce Planners can help you identify a planning professional in your area.

Working with a mediator is less expensive than having lawyers battle it out.

10. Set a realistic housing budget.
Don't let emotion cloud your judgment about keeping the family home. Set a realistic budget that takes into account your mortgage, property taxes, and maintenance. Try to keep housing expenses to less than 35% of your after-tax income, one expert advises.

Divorcing women often pass up their ex's pension in favor of the house—even though the pension may be worth far more in the future.

If you agree to sell the house at a later date and split the proceeds, be aware of future tax implications. "If there's a large capital gain, you may have a large tax bill that was not taken into account at the time of the divorce," says Carol Ann Wilson. She is a certified divorce planner and author of several books on women and divorce, in Boulder, Colo. "If the home eventually will be sold, a divorce agreement can be structured to take advantage of both spouses' $250,000 exclusion," she says.

Published December 24, 2001