How to Handle Your Finances During a Legal Separation

1. Have Tough Financial Discussions

This is probably the first thing you should do once you decide on a legal separation.

Maybe you and your spouse weren't great at communicating about money during your marriage, but it's in your best interest to try and get better at it during your divorce. Depending on how you handled your finances in your marriage, this discussion may require deciding how to split up joint accounts and debts, or divvying up who pays what bills.

Part of the reason you want to have this "how do we handle our finances now" discussion now is to avoid misunderstandings later. For instance, you probably don't want your spouse racking up a lot of debt on your joint credit card and assuming you'll be cool with helping to pay it all off later. Setting the expectations upfront can help avoid difficulties in the coming months.

2. Understand Your Financial Picture

If you and your spouse agree that it's important to have some conversations about your finances, and if you both are still able to work together reasonably well, you'll want to try to get a clear picture of your financial situation. However, you don't need their input to start getting a handle on your whole financial picture. That means analyzing several items:

• Your assets: This includes what you have separately and jointly, such as checking accounts, vehicles, retirement accounts and furniture. This can mean different things depending on the state you live in. For instance, if you live in a community property state, your home is probably going to be a shared asset that needs to be divided, with you both owning half of it.
• Your debts: This is everything from credit card debt you've accumulated during the marriage to student loans to your mortgage and car loans. Again, what debt belongs to whom may depend on your state and how it views debts.
• Your budget: Even if you and your spouse are going to share the same space for a while, creating a realistic budget that covers your income and expenses is important. Maybe you're now taking over half the grocery bills, or assuming the mortgage payment on your own. Draw up a new budget that ensures your income will be able to cover your fixed expenses, debt payments and savings while leaving a little room for some discretionary spending.

Although there can still be much about your finances that changes between now and your divorce being finalized, getting a handle on your financial picture now will help you move forward with more confidence and, hopefully, can help you avoid some of the setbacks.

3. Keep Accurate Records

Financial record-keeping is essential anytime to ensure you keep track of your money. However, during a legal separation, it becomes even more important. You may need to prove something in court, such as that you've paid a bill or that you didn't make a charge, and the records you keep can back that up.

Some records you'll need to be sure to keep include:

• All correspondence related to joint debts, both with the creditor and your spouse
• Proof of payments made on joint debts, such as canceled checks, credit card receipts and the like
• Documents relating to the opening of new, separate accounts after your separation
• Any documents you feel may be required to prove you stopped using joint accounts, such as credit card statements from your new account

These documents may not be necessary in your divorce, but having them on hand is much better than not collecting them and having to prove, for example, that you didn't put a large purchase on a joint credit account.

For extra security, keep both paper and digital copies of these records. If you are still living with your spouse and feel it necessary, it may also be a good idea to send a copy to a trusted friend or family member as a backup.

4. Open New, Separate Accounts

This would be the time to open new and separate checking accounts and savings accounts, as soon as feasibly possible. Depending on your credit history and income, it may also be ideal to apply for your own credit card (if all the cards you currently have are in the other person's name).

Your credit report and credit score will not be merged with your spouse's, but your credit behaviors as a couple will influence both of your credit files—if you hold joint credit accounts. Establishing separate accounts for yourself will help you in the long run.

5. Pay Joint Debts

To protect both of your credit scores, you and your partner should continue to make agreed-upon payments on joint debts (such as maintaining your monthly mortgage payment). If you're financially able, it's also a good idea to try and start paying down those debts.

Should your spouse be unable to pay a debt in a timely manner, or offer up their fair share, you'll need to pay it. After all, your name is on the debt too. Credit card companies won't care whether it's fair or not that you're paying all of the debt off and your ex is flaking out.

If you decide that it isn't fair that you're the one doing all of the heavy lifting on paying off joint debts, you're probably right—but late payments and defaulting on debts can severely impact your credit score. So it's in your best interest to keep up payments.

6. Think About Retirement Accounts and Insurance

This is where having a financial planner can help out a lot, and if you both already have one, set up a meeting.

While any retirement accounts you or your spouse have won't be officially separated until your divorce is finalized, now is a good time to work with an attorney and/or an accountant to figure out what impact that may have on your balances and your future plans.

Similarly, if you have a health insurance policy through your spouse, you likely will be able to stay on it until your divorce is finalized. However, now is a good time to begin looking at your policy options—through your job or otherwise—and determining how this new expense may impact your budget.

If you each have a life insurance policy, you may want to remove each other as beneficiary. Although, if you have children, you may want to tinker with the policy and leave some money to your spouse, who may need a lot of financial support to care for your kids—and perhaps have some of the funds go into a trust for your kids.

Yes, it is a little surreal to think about estate planning and the end of your life while you're figuring out the end of your marriage, but it is important to consider.

The Bottom Line

Divorce can be one of life's hardest experiences to get through—but money problems will only make the landing worse. You might want to think about your finances as the foundation of a divorce, almost as much as it can be for a marriage. The stronger your financial foundation in a divorce—or a marriage—the better off you are going to be.