How to avoid bankruptcy during a divorce


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Divorce is one of the leading predictors of both bankruptcy and home foreclosure. Women are especially prone to a long-term financial fallout from divorce. Within a year of the end of their marriages, women are three times more likely to live in poverty than men, according to U.S. Census Bureau data. The London School of Economics found that women experience a 20 percent decline in income when their marriages end.

The financial pain continues into retirement age. According to a 2014 report by the General Accounting Office, 4 percent of married men and 5 percent of married women over the age of 65 live in poverty. Meanwhile, 11 percent of divorced men and 18 percent of divorced women live in poverty.

How can you survive divorce and not only stay financially solvent, but also thrive?

When you’re thinking about divorce (but aren’t sure yet)

Maybe you are exploring your options or actively planning your escape. Perhaps it is a mutual, mature decision, or you are leaving a dangerous situation. The advice for all of these situations is the same: Secure your own money, earning power, and legal and financial information.

Try to be calm-headed and get the emotional support you need so that you can make rational decisions from a place of confidence and security, as opposed to fear and panic.

Meet with a lawyer

Many family and divorce lawyers offer a free first visit, which can not only give you a sense of whether this person is a good fit, but also free legal advice. Take notes! You may choose to DIY your divorce, work with a mediator or choose collaborative divorce. But, research your options first.

Call your accountant and financial planner

Tell them what is on your mind and ask them what information you need to collect, as well as which moves you should make to help you make your decision.

Collect all the docs

The more you know about your financial situation, the better your chances of making wise decisions from a place of confidence and knowledge — not fear and panic. In initial meetings with attorneys, the more information you can provide, the better advice they can offer.

Also, it is very common for spouses to enter the divorce process with huge blind spots in their financial picture. Collect:

  • Tax returns for the past three years
  • Pay stubs and W-2s for both partners for the past three years
  • All bank, savings, investment and retirement accounts (note whose name is on each of these accounts)
  • Statements for all debts: Mortgages, home, student, credit card, medical, family and friends. Again, note whose name is on each.
  • Estate plans, including wills, durable power of attorney, trusts and life insurance
  • The monthly household budget, including child care, school tuition, kids’ extracurricular activities, utilities and food
  • Employment contracts
  • Pension statements
  • Health insurance information. If your family relies on your employer’s plan, get the most current information on the premiums for a whole family, single person, or one parent and children. Find this information for your spouse’s employer and/or the marketplace.

Understand your home value

Your home is likely your biggest investment (and one of the highest-conflict issues in divorce). Locate your mortgage statement, understand whose name is on the note, the interest rate and the remaining balance. To understand whether you can afford to keep the home or whether it makes sense to sell, calculate property tax, home association fees, utilities, repairs and maintenance.

Then, research your home value to calculate any equity you have in your home (which should be split between you and your spouse, assuming you bought the home together and a prenuptial agreement does not preclude this).

Understand how much money you will need to live comfortably — and devise a plan to earn it

Alimony law is changing quickly, and lifelong maintenance is becoming a thing of the past. Stay-at-home parents may receive short-term alimony until they can rebuild a career and, increasingly, as women earn and achieve professionally, it is the ex-wives who are required to pay spousal support.

Regardless, no one can expect to be fully supported by their ex in a divorce. If your income is too low to maintain a home without money from your spouse, map out a career plan to either return to work, change careers or employers, or work towards a raise, promotion or business expansion.

Do not ignore retirement and other long-term financial planning. I understand that you are likely stressed about your month-to-month budget, but even modest planning can help.

Get your credit in order

A strong credit score and history are critical to landing on your feet after divorce. After all, you are likely to need a credit card to pay for attorney fees and to establish a new household, as you may need to find a new apartment, finance a new or existing mortgage, or otherwise obtain credit to move into your new life.

Run a credit check on yourself and your spouse, and work to clear up any errors or defaults. Understand which accounts you are responsible for and prioritize making sure that these are both up-to-date and error-free. Understand that in a divorce, any debt shared by the two of you will be divvied up — but that does not affect your agreement with the lender. So, if your spouse will be held accountable for the balance on a shared credit card, understand that you are responsible for that debt until your name is removed from the card.

If you have a short (or no) credit history, open a secured credit card, use it monthly and always pay off the balance on time to build your credit.

When you’ve filed for divorce

One of the most common mistakes that divorcing couples make is ignoring the monthly bills, assuming that the other spouse is paying them or that failure to pay will harm the other. Take neither of these ideas for granted. The most important thing you can do during this time of transition and turmoil is to stay on top of your mortgage, taxes, utilities, debt, insurance and tax bills.

Get and maintain your own accounts

When it has been established that a divorce is happening — regardless of whether or not both parties agree — quickly move to separate all of your accounts: Bank, savings and credit card. It is common for one party to withdraw large sums of money or make large charges on a credit card without the other’s knowledge or consent. If you are tempted to make such withdrawals and charges, don’t! You will likely be held accountable later, and this will heighten any conflict in the proceedings — which will only cost you in attorney’s fees and ill will with your ex.

If you have a shared cell phone plan, get your own line for both the sake of privacy and as a step towards you own, independent life.

Continue to monitor, build and grow your credit

No matter what the court orders and settlement agreements say, divorce is one of the most common times when errors, fraud and damage can happen to your credit. Check your current score to find out where you stand. Then, set up alerts for any flags on your credit report and keep an eye on your score as accounts are opened and closed.

Remember that even if an agreement or court order mandates that your ex must make payments on debt you once shared, you are still responsible for that balance as long as your name is on the account.

Change your estate plan

You may never have had an estate plan in the first place. Regardless, now is the time to revisit your will. All legal documents must be revised to reflect your new life.

Amp up your earnings

At least in the short term, both parties are poorer after divorce. It is twice as expensive to maintain two homes instead of one, and you may find yourself making alimony and child support payments, which can be steep. Your attorney can help you understand what to expect. Chances are that you will need to find ways to earn more money sooner rather than later. This may mean buckling down on your goals in your current job, discussing with your boss a plan for advancement, asking for an overdue raise, changing companies, launch a side business or returning to school to switch careers altogether.

If you are currently staying home full-time with children, it is time to get back to work. Alimony law is changing, and judges expect both parents to work full-time. Child support should not be expected to cover all of your expenses. Plus, a career of your own is the best financial security for you, your family and your long-term relationship with your ex.

The sooner you take steps to improve your income, the quicker you will move forward after divorce. You can even look into taking on a part-time job to help supplement your income during those tough years.

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