Managing Finances After Divorce
There are few things in life that can throw a wrench in people’s finances like a divorce. The loss in income is likely greater than the drop in expenses. There may be joint debt that you have to figure out how to repay and wills, life insurance policies, and other documents that are now outdated. If you and your ex-spouse divided up financial responsibilities – for example, you did the budgeting and he or she took care of retirement planning – you may be worried about handling tasks you did not have to deal with before. However, by arming yourself with knowledge and taking the time to create a new plan, you can have a financially successful future.
Now, total up all of your expenses. If they are less than your income, great! If they are more, go back to your budget and think about what changes you can make. Can you bring your lunch to work instead of buying it there? Cut your land-line and just use your cell-phone? Give up your tap dancing lessons? Be honest about what is truly a necessity and what can be reduced, postponed, or cut out completely. Also consider if there are ways you can increase your income, such as rent out a room in your house (if you are a homeowner) or get a part-time job.
Creating a budget on paper is only the first part – in order for it to be useful, you need to follow it. Put your budget on your refrigerator door or other visible spot in the house, and make an effort to track your spending on a regular basis. (You can use the above-mentioned tracking worksheet, a computer spreadsheet, or budgeting software.) This way, you will know when you have reached your spending limit for the month in a particular category. If you have a hard time sticking to your budget, some of your categories may be unrealistic. For example, perhaps you thought you could keep your supermarket spending at $50 a month but now realize you cannot live with eating Ramen noodles seven nights a week. Or perhaps new expenses came up that you did not have before. Go back to the drawing board, and figure out what adjustments you can make.
In general, a credit card is the easiest type of credit to get. However, if you currently have no or a poor credit history, even getting a regular credit card could be difficult. Luckily, a regular credit card is not your only option. You can also apply for a secured credit card. A secured credit card requires you to put down a cash deposit, which the creditor can keep if you do not make your payments. (You get the deposit back otherwise.) The credit limit is usually low, and the fees can be high, but after a year or two of on-time payments, you may be able to convert it to a regular credit card. Another option is a retail card, which can only be used at the store that issued it.
Once you have credit, it is very important to make your payments on-time and keep your balances low. If you make your payments late and/or have a lot of debt, you will only be building a negative credit history. Collection accounts, repossessions, foreclosures, and bankruptcy are especially damaging to your credit score.
Another wise financial move is to check your credit report regularly. Many credit reports contain errors, and if yours does, you will want to know so you can have it corrected. Checking your credit report can also allow you to spot identity theft. Unfortunately, it is not unheard of for people to take out credit in their ex-spouse’s name. (Of course, a stranger could steal your identity too.) You can get a copy of your credit report from each of the three credit bureaus, Equifax, Experian, and TransUnion, free once a year from the Annual Credit Report Request Service. If you see an error or believe you were the victim of identity theft, contact the relevant credit bureau(s).
If the divorce decree says that your ex-spouse is responsible for paying a debt, you may think that you do not have to worry about it, but that is not necessarily the case. Keep in mind the divorce decree is only between you and your ex-spouse and does not sever your obligation to creditors – if your name is on the account, and your ex-spouse does not make the payments, the creditor can collect from you. (This only applies if you are a joint account holder, not an authorized user.) The payment history for the account can also still be reflected on your credit report. So, what can you do? One option is to ask the creditor to remove your name from the account. They may or may not agree. Another option is for your ex-spouse to pay off the old debt with new debt in his/her name only (for example, refinance the house or do a balance transfer on a credit card). However, this may not work if your ex-spouse has a poor credit history. As a last resort, you can monitor the account on-line (most creditors let you do this) and make the payment yourself if your ex-spouse fails to pay. This will prevent a late payment mark from appearing on your credit report. You then may be able to collect the money you paid from your ex-spouse under the divorce decree. (Talk to your lawyer for more information.)
It is common when people are married to name their spouse as the executor of their estate and beneficiary in their will and life insurance policy, as well as give him or her power of attorney. Unfortunately, it is also common for people to forget to update important legal/financial documents when they get divorced. If you want to make changes, don’t delay – you never know when something could happen. (However, keep in mind that if you are still going through divorce proceedings, you may not be able to make changes until it is finalized.) If you have minor children and want to make them the beneficiaries, you will have to name a guardian of the estate, since minors generally cannot directly control assets. It does not have to be your ex-spouse, even he or she gets custody of the children if you die – you can name another person or even an institution. Your lawyer can help you figure out what would work best in your situation.
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