Divorce and Finances

Divorce can be a complicated and challenging process in which details are easily overlooked. Protecting your financial health during this time is crucial, and no one should enter this process without a trusted attorney (specializing in divorce) on his or her side. Equally important is knowing the laws that shape divorce proceedings, and the impact they can have on your assets.

Dividing the Assets

As a general rule, assets and property acquired during the course of a marriage are divided when the spouses divorce. While there may be exceptions for individual inheritances, gifts to an individual spouse, and assets or property acquired before marriage, the big difference among states is what formula might be followed for the division. The state laws on this generally fall into one of two categories.

• Common law property states are those where the judge may consider a wide range of circumstances before ordering a division. Among the factors are each spouse's earning ability, the length of the marriage, and how much each spouse contributed to building household assets.
• Community property states are those in which assets and property acquired during the marriage are divided more or less equally.

Most states follow the common law principle. The exceptions are Alaska (community property optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Don't try to hide assets from the court, either by neglecting to mention them or transferring them after the proceedings have begun. This can trigger penalties and additional court actions.

Dealing With Debt

Divorce does not eliminate debt, it divides it between the two spouses. But as with assets, practices differ.

• In a common law property state, each divorcing partner generally gets responsibility for the debts he or she incurred in individual accounts. Debt in joint accounts -- or debt attached to jointly-owned property -- is generally divided in the same way as the marital assets.
• In a community property state, debt -- like your assets -- is typically split down the middle, without regard to whether the debt had belonged to a joint account or to an individual account held by either spouse.

One important trap to avoid is maintaining joint accounts after the divorce. Your spouse could continue running up expenses and leave you with the debt. As soon as the divorce is finalized, freeze all joint accounts and have your creditors reclassify them as individual accounts. Most creditors will do this at your request, though they are not legally required to do so. To protect your credit rating, make sure to keep up with monthly payments.

If you and your spouse own a home that has appreciated in value, you may want to sell it before the divorce is finalized. Federal tax rules offer an exclusion of up to $500,000 in realized capital gains for married taxpayers. This amount is cut in half for single filers. Be sure to consult a tax advisor for additional information about these rules.

Retirement Assets

Money in either spouse's 401(k) or pension plan may legally be divided during a divorce. To claim a share of a spouse's 401(k) or pension plan 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.