Managing Your Finances During a Legal Separation

When a marriage is coming to an end, a legal separation can significantly impact your financial situation, for better or worse. Much like handling a divorce, the financial outcome of a legal separation largely depends on how you and your soon-to-be ex-spouse approach the situation. While your marriage may not be legally over yet, it is often best to operate as if you are financially independent of one another. Here are some strategies to manage your finances during a legal separation and prepare for single life again.

Have Tough Financial Discussions

The first step once you decide on a legal separation is to have some difficult financial discussions. Even if you and your spouse were not great at communicating about money during your marriage, it is in your best interest to improve this communication during your separation. Depending on how you managed your finances during your marriage, this discussion may involve deciding how to split joint accounts and debts or determining who will pay which bills.

Having this “how do we handle our finances now” discussion upfront can help avoid misunderstandings later. For instance, you probably do not want your spouse racking up a lot of debt on your joint credit card and assuming you will help pay it off later. Setting expectations early can help avoid difficulties in the coming months.

Understand Your Financial Picture

If you and your spouse agree that it is important to have conversations about your finances and if you can still work together reasonably well, you will want to get a clear picture of your financial situation. However, you do not need their input to start understanding your financial picture. This involves analyzing several items:

• Your assets: This includes what you have separately and jointly, such as checking accounts, vehicles, retirement accounts, and furniture. The division of these assets can vary depending on the state you live in. For instance, in a community property state, your home is likely a shared asset that needs to be divided equally.
• Your debts: This includes everything from credit card debt accumulated during the marriage to student loans, mortgage, and car loans. Again, the division of debt may depend on your state and its laws.
• Your budget: Even if you and your spouse are sharing the same space for a while, creating a realistic budget that covers your income and expenses is crucial. You may now be responsible for half the grocery bills or the entire mortgage payment. Draw up a new budget that ensures your income can cover your fixed expenses, debt payments, and savings while leaving room for discretionary spending.

Although your finances may change between now and when your divorce is finalized, understanding your financial picture now will help you move forward with more confidence and avoid some setbacks.

Keep Accurate Records

Financial record-keeping is always essential, but it becomes even more critical during a legal separation. You may need to prove something in court, such as that you paid a bill or did not make a charge, and the records you keep can back that up. Some records you should keep include:

• All correspondence related to joint debts, both with the creditor and your spouse
• Proof of payments made on joint debts, such as canceled checks and credit card receipts
• Documents related to the opening of new, separate accounts after your separation
• Any documents that may be required to prove you stopped using joint accounts, such as credit card statements from your new account

These documents may not be necessary for your divorce, but having them on hand is better than not collecting them and needing to prove something later. For extra security, keep both paper and digital copies of these records. If you are still living with your spouse and feel it necessary, consider sending a copy to a trusted friend or family member as a backup.

Open New, Separate Accounts

Now is the time to open new and separate checking and savings accounts as soon as possible. Depending on your credit history and income, it may also be ideal to apply for your own credit card if all the cards you currently have are in your spouse’s name. Your credit report and credit score will not be merged with your spouse’s, but your credit behaviors as a couple will influence both of your credit files if you hold joint credit accounts. Establishing separate accounts for yourself will help you in the long run.

Pay Joint Debts

To protect both of your credit scores, you and your partner should continue to make agreed-upon payments on joint debts, such as maintaining your monthly mortgage payment. If you are financially able, it is also a good idea to start paying down those debts. If your spouse cannot pay a debt on time or offer their fair share, you will need to pay it. After all, your name is on the debt too. Credit card companies will not care whether it is fair that you are paying all the debt off while your ex is not contributing.

If you feel it is unfair that you are doing all the heavy lifting on paying off joint debts, you are probably right. However, late payments and defaulting on debts can severely impact your credit score, so it is in your best interest to keep up with payments.

Think About Retirement Accounts and Insurance

This is where having a financial planner can be very helpful. If you both already have one, set up a meeting. While any retirement accounts you or your spouse have will not be officially separated until your divorce is finalized, now is a good time to work with an attorney or accountant to understand the impact on your balances and future plans.

Similarly, if you have health insurance through your spouse, you will likely be able to stay on it until your divorce is finalized. However, now is a good time to begin looking at your policy options through your job or otherwise and determining how this new expense may impact your budget.

If you each have a life insurance policy, you may want to remove each other as beneficiaries. However, if you have children, you may want to adjust the policy to leave some money to your spouse, who may need financial support to care for your kids, and perhaps have some funds go into a trust for your children.

It may feel surreal to think about estate planning and the end of your life while figuring out the end of your marriage, but it is important to consider.

The Bottom Line

Divorce can be one of life’s hardest experiences, but money problems will only make it worse. Think of your finances as the foundation of a divorce, just as they can be for a marriage. The stronger your financial foundation during a divorce or marriage, the better off you will be.

At O1ne Mortgage, we understand the complexities of managing finances during a legal separation. If you need assistance with your mortgage or any other financial services, do not hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate this challenging time with confidence and ease.