Contemplating a Divorce: What Should You Do to Protect Yourself Financially?

Carrie Schwab Pomerantz
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Posted: Jan 23, 2013 12:01 AM

Dear Carrie, My sister is contemplating a divorce. She's always worked part-time but has pretty much let her husband handle the money. She also has two kids under 10. I'm worried and want to help. Do you have suggestions for how she can protect herself financially? --A Reader

Dear Reader, When facing a divorce, emotions often cloud financial judgment, so your sister is lucky to have someone like you to help her think clearly. She could have to deal with some potentially contentious issues, such as division of assets, payment of outstanding debts, spousal and child support -- all of which can seem overwhelming, especially to someone who's not used to handling financial matters.

Preparation is your sister's best protection. There are a number of things she should think about -- and do -- whether or not she ultimately decides to divorce. And while she'll have to handle many of the details herself, you may be able to lend a hand by helping her prioritize and take things step by step.

Collect financial information

To me, no matter what the circumstances, each partner in a marriage should be aware of overall household finances and have access to financial information. For your sister, gathering this information will be the first step toward feeling more secure. Records she should have on hand include:

--Property owned (i.e., house, car) and how it's titled

--Outstanding mortgage or home equity loans

--Bank and investment accounts, including account numbers and balances

--Consumer debt such as credit card balances and auto loans

--Types of insurance (homeowners, auto, life, health) and where the policies are kept

--Retirement accounts, both her own and her husband's

--Estate planning documents (wills, trusts, etc.)

It would also be wise to take an inventory of household goods and personal property. All of these things can factor into a divorce settlement.

Establish individual credit

If she doesn't already have at least one major credit card in her name only, urge your sister to open one immediately and use it. This will help her establish a personal credit history, which will be essential should she decide to be on her own.

Once she has her own credit in place -- and she's started divorce proceedings -- it would be a good idea to close old joint credit card accounts. It's best to do it in writing, clearly stating that she's no longer responsible for new charges. Letters should be dated and copies kept.

Figure out short- and long-term financial needs

Your sister should also do some serious thinking about what she needs to support herself and her children both now and in the future, including:

--Monthly living expenses, including mortgage or rent, utilities, groceries, transportation, healthcare, insurance, etc.

--Childcare costs

--Big-ticket items, such as orthodontics, lessons and other extracurricular programs

--College costs

This is the type of planning everyone should do, regardless of marital status. Perhaps you can talk to your sister about your own budgeting to give her an idea of what's realistic.

Separate assets

It would be good for your sister to complete the previous steps even if she doesn't go through with a divorce. If she does decide to divorce, depending on state laws, she can also begin to separate her assets even before divorce papers are served. She should check with her attorney and banker about closing any joint checking and savings accounts and putting half the money into her own account. Another option is to place assets from a closed account in an escrow account until her divorce settlement is complete.

Once she and her husband have separated, she can also freeze assets in all joint brokerage accounts by immediately notifying their company in writing and asking that no transactions be made without her approval.

Consider mediation

If your sister and her husband are on relatively good terms, you might want to help her look into mediation. Mediation is often less contentious than litigation -- and can help reduce both the emotional and financial costs. There are organizations such as the Academy of Family Mediators that provide online resources and referrals to qualified mediators.

Look to the future

Regardless of whether or not your sister gets a divorce, encourage her to start to become more financially independent. Talk to her about setting some goals, developing a budget, creating an emergency fund and saving for retirement.

Discussing these ideas should give your sister a bit more assurance in dealing with the financial aspects of a potential divorce. Whatever her decision, ideally she'll end up with more financial knowledge and a greater sense of personal security. I wish her the best.

The information herein is not intended as Legal advice. Where such advice is necessary and appropriate, please consult a qualified attorney.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of "It Pays to Talk." You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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