09/15/2010 11:19 am ET Updated Nov 17, 2011

The Financial Challenges of Divorce

Even in a strong economy, divorce is often difficult and costly; but in a prolonged recession it can be financially devastating. For example, suppose that:
  • Neither spouse can afford to buy out the other and you're forced to sell the house or car at a loss -- or even go into foreclosure.
  • One of you has been unemployed for a prolonged period and you've run up major debt.
  • You want joint child custody but can't afford to set up a second household.
  • One or both of you have difficulty finding independent, affordable health insurance.
  • The retirement and investment accounts you've accumulated together and now must divide have lost significant value.
Even in an uncontested divorce, recovering from any of these scenarios would be difficult. But if your divorce is acrimonious, additional legal fees could leave you further in the hole.

Here are some important financial issues to consider when you separate:

Get good advice. Do-it-yourself divorce kits are widely available, but even couples with few assets who part amicably still need capable representation. That may mean hiring an attorney who specializes in divorce to at least review your paperwork and make sure you haven't overlooked anything you might later regret.

To avoid a conflict of interest, each of you should have your own attorney. Ask friends for recommendations, including those who have recently divorced. If you know attorneys who specialize in other areas, they may be able to recommend a good divorce attorney. Another resource is the American Bar Association, which has a state-by-state search engine for finding legal help.

You may also want to consult a financial planning professional for advice on how to fairly divide property whose value has escalated (or plummeted), calculate child support and ensure you're sufficiently insured, as well as explain Social Security and retirement plan implications.

A good financial planner could save you money in the long run by helping to avoid prolonged court battles and mapping out a plan for future financial security. If you don't know one, good resources are the Financial Planning Association and the Institute for Divorce Financial Analysts.

Protect your credit. To protect your credit status, close joint bank or credit card accounts and open new ones in your own name; otherwise, an economically struggling or vindictive ex-spouse could amass debt in your name and ruin your credit. Be sure all closed accounts are paid off, even if you must transfer balances to your new account and pay them off yourself. That's because late or unmade payments by either party on a joint account -- open or closed -- will damage both of your credit scores.

Check your credit reports before, during and after the divorce to make sure you're aware of all outstanding debts and to ensure that all joint accounts were properly closed. The three major credit bureaus, Equifax, Experian and TransUnion, don't always list the same accounts, so to be safe, order credit reports from each. You can order one free credit report annually from each through or more frequently for a small fee from each bureau.

A few other tips:
  • Before hiring an attorney or financial advisor to oversee your divorce, make sure you fully understand how they will bill their time, whether hourly, fixed fee, or some combination, depending on the case's complexity.
  • To simplify their task (and thereby lower fees), gather copies of important financial paperwork including: tax returns; retirement account records; current pay stubs; employee benefit statements; life, health, homeowners and auto insurance policies; bank, brokerage, mortgage and credit card account statements; home deed or lease agreement; and wills, trusts and other legal documents.
  • Your attorney may need to file a Qualified Domestic Relations Order (QDRO), which establishes your right to receive a portion of your former spouse's pension or other retirement plans. Be sure to consider their future value, especially if you've suffered recent investment losses in your 401(k) plans.
  • Appraise real estate, artwork and collectibles to determine their value before dividing. The same goes if you co-own a business and one spouse will be buying out the other.
  • If alimony or child support are included in the settlement, take out a life insurance policy on the person paying it, which names the receiving ex-spouse as beneficiary.
Don't get caught up in the emotional turmoil of divorce and forget to protect your future financial interests.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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