Victim of ‘Divorce Season’? Protect Your Finances

By Kevin Voigt Personal Finance NerdWallet.com

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Like rainy weather and the NCAA championships, divorce is seasonal. That’s according to University of Washington researchers who reviewed 14 years of the state’s divorce filings and found consistent peaks in March and August. Other states show similar patterns.

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Why this “March Madness” for marriage? Researchers say the aftermath of Christmas and summer holidays might play a role. “The consistent pattern in filings, the researchers believe, reflects the disillusionment unhappy spouses feel when the holidays don’t live up to expectations,” reads a university report on the study.

In addition to emotional stress, divorce can bring financial pain, particularly for people who’ve never made financial decisions alone.  This can lead to distressing questions, ranging from the simple (“Which bank do we use again?”) to the complex (“How do we divide stock purchases we made as a couple?”).  It’s important to tackle issues one at a time so you don’t become overwhelmed.  

If your marriage is poised to break up — or has recently — take these steps to address the split’s financial aspects.

Protect your credit score

Until the ink is dry on the divorce agreement, you must keep up payments on any shared debt and expenses, such as mortgage and credit card payments or electricity and Netflix bills. Remember, a history of on-time payments is an essential ingredient in a strong credit score.  Missed payments will hurt both of your abilities to secure more credit as you set up separate households, so monitor your credit score closely during this period.

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Take inventory of shared assets

You can’t know if you’re getting an equitable share of the assets if you don’t know what’s on the table. Experts recommend figuring this out by collecting five years’ worth of financial data, including tax returns and statements from your shared investments or retirement savings.

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How assets divide depends on where you live. Residents of nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — follow the laws of “community property,” in which partners split all marital property equally, such as real estate and retirement assets. Almost all other states require “equitable distribution,” a fair — but not necessarily equal — division of assets. Alaska, the sole exception, allows residents to “opt-in” for a community property split.

Understand the retirement savings impact

During a divorce proceeding, the court could provide a “qualified domestic relations order” that determines the division of retirement savings. This might have further financial ramifications. For example, if you receive a portion of your spouse’s 401(k), you might want to roll it into an individual retirement account to defer paying taxes on the cash.

If your spouse has a pension, the way he or she elects to take it — and the QDRO — could impact you down the road. A standard election means you’ll stop receiving a share when your ex dies; with a QDRO,  you might be able to get a survivor’s pension, typically half of the benefits your ex-spouse received.   

Lastly, update the beneficiaries on your life insurance and retirement accounts. Many people elect their spouses, but you’ll likely wish to choose a new beneficiary after a divorce.

Divorce is tough, but the better you prepare your finances, the better both partners will weather the breakup.

Kevin Voigt is a staff writer at NerdWallet, a personal finance website. Email: kevin@nerdwallet.com. Twitter:  @kevinvoigt .