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The Impact of a Divorce on Your Finances

Divorce can extract a heavy price -- both emotionally and financially. Protecting your financial health during a divorce is crucial. If you and your spouse are headed toward a split, be sure to learn about the laws that shape divorce proceedings and the impact they can have on your assets.

Dividing the Assets

Typically, everything you and your spouse acquired from the day you were married is subject to division. The exceptions are individual inheritances, gifts to an individual spouse and assets acquired before marriage. When assets are divided, the court considers each spouse’s earning potential, the length of the marriage, and each spouse’s contribution to building household assets.

There is, however, one important exception. Within the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) almost all assets typically are divided equally.

Dealing with Debt

If you live in a community property state, you will be responsible for half of all debt in jointly held accounts and, in some cases, for half of a spouse’s individual debt as well. If you don’t live in a community property state, you remain responsible for your individual debt (but not your spouse’s) and any debt in jointly held accounts. As soon as the divorce is finalized, freeze your joint accounts and ask your creditors to reclassify them as individual accounts.

In addition, include the payment of debt as part of the settlement. Take on the responsibility for the debt yourself, if necessary, and take a share of the assets to pay the debt down.

Your Retirement Assets

Money in your 401(k) or pension plan may legally be divided during a divorce. The divisible amount typically begins to accumulate on the day you are married and ends on the day you are divorced.

To claim a share of a spouse’s 401(k) or pension benefit, you need to obtain a court order called a Qualified Domestic Relations Order (QDRO) and provide it to your spouse’s plan sponsor before distributions are completed to your spouse, which prevents your spouse from making withdrawals. You and your spouse can decide to not divide your 401(k) assets or pension plan benefits, but you should make this agreement in writing and include it as part of the settlement to prevent the courts from declaring the money divisible.

If you find yourself faced with divorce, it is essential to protect your financial future. Enlisting the help of an attorney and carefully monitoring the process can ensure that your interests are considered and that you won’t need to revisit the proceeding later on.