Nobody ever wants to think about divorce and even fewer people talk about it, but I have had a lot of clients divorcing spouses and even the best divorce lawyer won’t help you with the nuts and bolts of your post-divorce finances. Don’t assume it will be okay. Do your own MATH!
1. MOVE ACCOUNTS/BILLS TO ONE PERSON’S NAME. If you have any contracts, loans, or accounts with both your names on them, you must change them to ONLY the responsible party. All credit cards, auto loans, consumer loans or mortgages and HELOCs in both of your names must be paid off in their entirety or refinanced (in the case of mortgage you can refinance or for a credit card, pay it off with a new credit card in your name) only in the name of the person responsible for the debt.
Here’s the deal: the lender could not care less if you’re divorced or not, whoever is listed on the contract is responsible. If your spouse is going to get the car in the settlement he/she has to get the car payment too. If your spouse misses a payment and you’re still both listed, you’re on the hook, divorce or not. You must complete the transition from both your names to one responsible individual preferably before your divorce agreement is signed.
2. MAKE TWO LISTS.
- CURRENT – Make a list of all current household contracts and responsibilities including ones with only one of your names on it. Even if the bill or item seems small, you have to divide up the responsibility. This includes things like electric bills, landscaping contracts, cable/internet and ITunes.
- FUTURE – Make a list of every FUTURE financial responsibility for you and your children until your last child enters college. Yes, college! It won’t be perfect, but try to be as detailed as possible. Braces, concerts, school trips, studying abroad, travel on holidays, sports equipment, tutoring, transportation. Don’t forget therapy that might be needed for you or your kids after the split. Your kids may need two sets of things for two households, computers, clothes etc.
Don’t forget about health insurance. SIgn up for your own health insurance (and for kids). Once you’re divorced you cannot continue on your spouse’s plan. COBRA is available for 3 yrs, but it’s pricey. If you can’t financially handle your own premiums make sure you get some support in your divorce agreement at least for a transition period.
If it’s not in the agreement, it’s on your dime.
3. DO YOUR OWN POST-DIVORCE CASH FLOW. Once you have a DRAFT agreement in place, do your own monthly cash flow (or budget). Figure out exactly how much income you will have after-tax including your salary, child support, alimony or whatever other income you may have (e.g. basement apartment rent). Make a list of all your monthly expenses that YOU are responsible for (remember items 1 & 2 above). Subtract your expenses from your income and make sure the number you’re left with is positive. If it is not, you may need to renegotiate your agreement.
Also, make sure you run the same cash flow AFTER your alimony runs out (maybe you only get 5 years of alimony) or your child support (one child turns 18 and 2 are left in your home). Make sure you are still spending less than you earn each month after these legal obligations go away. If you are not, you have to renegotiate your agreement or see about earning more money in your job. Don’t forget the future. It may look different.
Yes, in five years you may be remarried or maybe your alimony goes away if you cohabitate or remarry, make sure you can live on what you earn (after-tax), in that case. You will have to estimate future expenses, but you will get close enough to know if you will be able to survive or not.