Divorce: How to Make a Clean Financial Break

How often have you heard about a divorce that went well? And when someone tells you their divorce went smoothly with no hard feelings, you would be smart to wonder how the other side felt about the divorce settlement. There are definitely winners and losers in divorce proceedings, and all too often, one party is left with too few assets or too many debts. These days, it's not just a question of who gets the house. It's also about who has to pay off the loans - a big factor in today's credit-mad society.

So what should you do to make a clean break from someone else? You must split your financial life formally and legally. You also need to continually check your own credit report to make sure that your ex-spouse is doing what they are required to do (and no more). If your name is still on a loan or credit card, it can take some expensive legal wrangling to prove that you're not responsible for old debts or debts incurred after the divorce is final. And the final ruling might not be in your favor.

Pay careful attention to the following details:

Credit Cards - These should be paid in full and closed. If there isn't cash available to pay off the cards, then a balance transfer should be made to a new card that is issued only to the responsible party's name. It's not enough to close the old card to new charges. The truth is that if both of your names are on the card, then either one of you can reopen the account to new charges without the other's knowledge. The result can be disastrous to your financial health.

Mortgages - Typically, your divorce degree will tell you who is responsible to pay the mortgage. However, if the mortgage is in both your names, it should be refinanced into the responsible party's name. If your name is still on the mortgage, and you're no longer responsible for payments, your ex-spouse's late payments could affect your credit and your ability to finance a new home.

Loans - Your loans should be handled the same way as the mortgage. Even a relatively small loan, like an appliance store credit account, needs to be transferred to the responsible party's name. Small loans can hurt your credit when they are paid late or defaulted.

Beneficiaries - Beneficiaries are often forgotten in divorce proceedings. I'm not talking about the physical presence of your loved ones and dependents, I'm talking about the name you've automatically written on all your accounts since you were first married. Who gets your assets if something happens to you? If you've always written your spouse's name, then you need to update the beneficiary line on your investment accounts, insurance policies, and retirement accounts to make sure that the parties who most need the money will have it available to them.

I have a client who missed one of these details with her divorce. As a result, she was threatened with wage garnishment and had to make the difficult decision to file for bankruptcy. She now has a higher interest rate on her mortgage, credit cards, and homeowners' insurance. Higher rates mean that it's much harder for her to afford some of the necessities.

A personal friend of mine filed for bankruptcy with his divorce and thought that all of his credit debt was in the bankruptcy. When he went to purchase a new car, he found out that one credit account was not included in the bankruptcy and therefore he had trouble getting his auto loan. He did finally get the loan, but at a much higher interest rate.

Don't let this happen to you. Making a clean financial break will make it much easier for you to start over. If you're not sure which debts are in your name, ordering a credit report can give you the knowledge you need to begin sorting through the details.