The first week of January is traditionally a time that sees an increase in couples filing for divorce and, after a year of lockdowns putting added stress on relationships, this month may see even more couples deciding to divorce.
Divorce is an extremely stressful process for most people and the impact it can have on finances, especially during this time of economic uncertainty, will add to the pressure. Here we’ve looked at how to organise your finances during a divorce to help ease the stress.
For married couples who own their home, deciding who, if either, of the couple gets the home is often one of the main focuses when sorting out finances during a divorce. Ideally, before deciding what to do with the property, couples should get legal advice, as there are several options available.
Couples who both decide they want to sell the house need to remember that they will still need to cover the costs of selling the property, including estate agent and solicitor fees. As such, they should ensure that they have enough equity in the property (the amount of the house they own) to make selling it and splitting the money worthwhile. For example, a couple who only owns 15% of their home – which is 85% loan-to-value (LTV) – that is worth £200,000, will only get £30,000 from the sale. This £30,000 may also need to cover the costs of selling the property, which would mean that they would get less than £30,000 and would then need to split the remaining money. Couples should also keep in mind that this year could see house prices fall, in which case, couples may see their property selling for less than they bought it for.
Another option available to couples who do not own much equity in their home or when one person wants to stay in the home, is for the person in the house to buy out their partner. For those considering this option and who do not own, or will not be able to own, the property outright, they need to consider whether they would be able to get a mortgage on their single income, as well as whether they will be able to cover the costs of running and maintaining the property. Before taking this option, it might be advisable to speak to a mortgage broker, who will be able to provide information and advice on what mortgage options are available.
Most couples will have taken out debts, such as credit cards or personal loans, during their marriage, but when deciding to divorce they can cause issues, especially when deciding who is liable to repay the debts.
Contractually, the person whose name is one the debt is the person who needs to repay it. For example, if a credit card was taken out in the wife’s name alone, she would be responsible for repaying the credit card debt.
Debt becomes more complicated when it was taken out as a joint debt. In this case, normally both people will be responsible for repaying the debt. Normally, if one partner cannot make their share of the debt repayment, the other person will be responsible for repaying the full amount.
For those getting divorced and who have a high amount of debt with various lenders, they may want to consider consolidating their debt with a personal loan, which may reduce the interest on the debts and make repayments easier to manage. Another option available to those with credit card debt is to transfer the debt onto a 0% balance transfer card, as this will make the debt cheaper to repay and, as a result, should help to clear the debt quicker.
Partners who have found themselves responsible for repaying debt that they are struggling to repay should seek advice from Citizens Advice or a free debt charity. Alternatively, if one person does not believe that they should be responsible for repaying a joint debt, for example the debt only benefited the other person, they should seek legal advice to see what their options are.
Although getting divorced won’t impact your credit score, if you have been financially linked to your ex-partner, for example having a joint bank account, mortgage or credit cards, and they have a low credit score this will likely have a negative impact on your credit score. When getting divorced, it is important to remove any financial links with your ex-partner through getting a ‘notice of disassociation’, as this will remove them from your credit score. A number of providers will allow you to check your credit history – a full list of which can be found here.
Often one of the biggest assets to take into consideration when divorcing, especially those divorcing later in life, is pensions. Whether or not pensions can be divided will depend on a range of factors, including the type of pensions held and where in the UK the couple are divorcing. Those set to get the New State Pension, which was introduced in 2016, cannot split their pension entitlement when they divorce and the amount they are entitled to depends on the amount of National Insurances contributions made.
It is important that in some circumstances when dividing pensions couples may need to take into account all their pensions including those they held before their marriage, but this will depend on where the couple is divorcing and the types of pensions they hold. For example, for those in Scotland the pension is valued on the date of separation, and only the value of the pension that was built up during the marriage can be divided.
When dividing pensions, couples should get advice from an independent financial adviser or their solicitor before they act.
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