Going through a divorce is never fun. Not for you, and definitely not for your children. The results of a heated, adversarial divorce can be catastrophic – both financially and emotionally for you. And a truly vitriolic divorce can put your children into therapy for many years to come.
Heading into divorce proceedings can be a big challenge on many different levels. Keep in mind that the goal is to get out of the process as inexpensively as possible while protecting whatever assets you have to help rebuild for the future.
The fact is, roughly 50% of first-time marriages end in divorce. Regardless of the circumstances, divorce is a painful and stressful experience that can take a toll on your finances.
So, this article is aimed at helping you avoid the financial nightmare that may arise during your divorce.
- How do I Avoid Financial Ruins in a Divorce?
- How will Divorce Affect my Finances?
- How do you become Financially Secure after a Divorce?
How do I Avoid Financial Ruins in a Divorce?
Read on for six tips to help you avoid a financial nightmare during your divorce.
1. Get a Clear Picture of Your Financial Situation
Your financial situation includes everything from your total household income, all investments, and all debts and liabilities. If you were not involved in your family’s finances, now is the time to immerse yourself in the details. Having a clear picture of your financial situation will lay the groundwork for an equitable divorce.
2. Find All Documentation
You will need to show proof of ownership of assets, both jointly and individually owned. Find documentation for everything like bank accounts, investments, cars, property, and other valuables. Determine which items are in your name, your spouse’s, or in both names.
3. Contact Your Certified Financial Planner
During a divorce, your partner can engage in dubious activities that will hurt you financially such as moving the funds or selling off assets without your consent.
Read Also: How can I be Prepared to Weather a Financial Storm?
Furthermore, in most marriages, it is a common practice that one spouse tends to manage the majority of finances and this can lead to all sorts of problems during the divorce if you were not the party that managed the shared finances. If that is the case, you will need to step up and educate yourself about managing the finances, which may very likely require you to seek financial advice.
You can hire a financial advisor or have someone who can help you understand your investments, assets and how to manage your liabilities to ensure a smooth transition to your new life.
4. Consider All Major Decisions
There are other important decisions that will need to be made that will have significant impact on your finances. Will you sell any property and split the proceeds, or will one of you keep it, paying half to your ex-spouse for their share? Do you need to go back to work after taking a substantial time off? Will you need to make a career change?
5. Don’t Forget About Your Needs
This part can be irritating if you have been married for a long time since you will need to reorganize your finances. Your finances include everything from all investments, debts, and liabilities; if you were not involved in your family finances, now is the time to immerse yourself in the details.
The first and important step is to cancel and remove yourself from all joint properties, bank accounts, insurance policies, and loans; anything that has both your names on it needs to be addressed. This will help you to have a clear picture of your financial situation and help you strategize towards your new financial goals.
6. Remember Your Estate Plan
You are more than likely to have named your spouse as your power of attorney or named them a primary beneficiary. You will want to contact your estate planning attorney to have your documents updated. Also, contact banks and financial institutions to update your beneficiary selections.
7. Create A New Budget
A divorce is a major lifestyle change as for a while you lived on two incomes but now you are down to one. Therefore, if you had a budget, it is time to create a new one and if you didn’t have a budget, it is important to have one as it is the only way to survive the transition and to thrive in your new life.
You need to re-evaluate your expenses as your past expenditures cannot fit into your new life of a single income. As a starting point, downsize your expenditures temporarily, stash away any extra money you can and live on a minimum budget to ensure you are setting a strong budget base for your new life.
How will Divorce Affect my Finances?
When contemplating divorce, many people put themselves under undue stress worrying about their financial well-being. Much of that stress is due to the fear of the unknown before, during and after divorce.
It is important to realistically focus on your financial situation since doing so will give you a sense of control over your life, which in turn can reduce your stress level. Your financial situation can be viewed in four categories: assets, liabilities, income and expenses.
Assessing Financial Assets In Divorce
Financial assets include cash, savings accounts, checking accounts, certificates of deposit, money-market accounts, stocks, bonds, real estate investment trusts (REITs), mutual funds and savings bonds. When considering divorce, these assets may be more important to the nonworking or lower-income-earning spouse, who may need to use them to cover some of his or her living expenses.
All assets do not have the same tax consequences! Retirement assets are generally before tax asset; this means that in order to access the money, you have to pay income tax on any distributions you receive. In some cases, you may also have to pay a penalty on the distribution in addition to the income tax.
For example, Mary suggested that Gus keep his retirement assets valued at $100,000, and she would take the money-market account (also valued at $100,000). Gus agreed because it looks like an equal division of the assets.
However, when Gus retires in a couple of years he will pay taxes on the distributions. So if Gus pays a tax rate of 25%, then he would end up with only $75,000 versus the $100,000 that Mary received.
It is important that you determine how defined-benefit plans, such as pensions, will be divided between you and your spouse. This is generally spelled out as a percentage of the retirement benefit at the time of the divorce.
It’s also imperative for the agreement to state if the employee’s divorced spouse will be entitled to survivor’s benefits if the employee dies. If not, and the now ex-spouse dies, this would leave you, the surviving spouse without money you had counted on.
The assets discussed in this blog are by no means exhaustive. You and your spouse may have other assets to value in addition to these. That’s why it’s important to get professional support.
Splitting The Real Estate After Divorce
Real estate includes your marital house and any other houses, vacation properties, timeshares, and rental properties, commercial or residential, as well as any business property. If you are like most people, you call the house a home.
The term home typically is full of emotional memories and can be a difficult asset to negotiate because of these feelings. If the property is going to be sold, consider who is going to pay the expenses until the property is sold. How will the proceeds (or debts, if the property sells for less than the amount left on the mortgage) be divided?
At Divorce, Debts Do Not Part
Generally, the person who keeps the property will be expected to pay the mortgage or debt related to that property. Does this mean that the other spouse has no financial obligation for a joint debt? Absolutely not.
Even if the spouse who assumes responsibility for the property pays the existing mortgage, both spouses will still be obligated to pay the debt. The divorce decree cannot terminate your financial obligation to your creditor.
Credit cards are another problem area. Do you know the balance on the cards? Whose name the cards are in? Does the non-debtor spouse have charging privileges on the card? Should you call and have charging privileges frozen?
Taxes
Often one spouse leaves completing the tax returns up to the other in the division of household labor. Each spouse should keep copies of joint tax returns. We recommend that you keep returns for at least the last 5 years; in addition, you may need records to calculate the cost basis for any assets that you keep.
It’s important when negotiating a settlement that you understand the tax implications. If you are filing jointly, one of you (if not both) will be filing as single and paying a higher tax rate. If there are dependent children, the spouse who is the custodial parent will likely benefit from a head of household filing status.
Child Support And Spousal Support And Who Pays The Taxes?
Child support can be confused with spousal maintenance, a.k.a. alimony. If you receive alimony, you will be taxed on what you receive. If you are the spouse paying the spousal support you will see a reduction in your income and will be able to deduct these monies from your federal income tax (at least through 2018).
Child support is not taxable to the spouse paying nor the spouse receiving the support. In my home state of Illinois, the calculation of child support is done by a state-mandated formula. And while there is a formula in Illinois for spousal maintenance, it is something that is negotiable, and the case must be made for the spouse claiming the need.
It is infinitely preferable that this is settled by negotiation rather than going to court to make that case. Be aware that these tax implications will change for divorces post-2018. For these divorces, the spouse paying alimony will NOT be able to deduct it from federal income tax, nor will the spouse receiving alimony be required to pay federal income tax. This is a huge change so you need to be aware.
Who Should You Turn To For Analyzing Your Financial Situation Before You Divorce?
During and after divorce, many people report their standard of living decreases, sometimes significantly. Unless you change your occupation for one with a higher paycheck, you will have the same amount of income but with an increase of expenses. Where there was once one house, there are now two that need to be sustained.
A good time to obtain a sense of where you are financially is when you are considering a divorce. Divorcing individuals need sound financial advice to ensure the settlement is fair to both parties. After a couple is divorced they will benefit from this assistance in adjusting to the new circumstances and planning for a secure future.
A Certified Divorce Financial Analyst (CDFA) is a professional that can review the offer on the table and project out 5, 10, 20 years to show you what your financial circumstances will look like if you sign the agreement. A Certified Financial Planner™ professional’s job is to give you an understanding of your financial needs.
The CFP professional can help you with budgeting, investing, retirement, and other financial planning issues during this very important life transition.
When contemplating or going through a divorce, take the time to evaluate your assets, liabilities, income, and expenses. With knowledge and support, you can reduce your stress level during this challenging period.
How does divorce financially affect women?
Generally, women suffer more financially than do men from divorce. The financial burden is greatest during the first year after divorce and varies depending on: (1) how much money the woman contributed to the family income before divorce, and (2) the ability and willingness of her former husband to make child support payments.
- About one in five women fall into poverty as a result of divorce.
- About one in four women lose their health insurance for a period of time after divorce.
- About one in three women who own a home and have children at home when they divorce lose their homes.
- Three out of four divorced mothers with child-support orders don’t receive their full payment.
- Women often need the help of public assistance programs to supplement their family finances, which often still fail to cover all financial necessities after divorce.
Although mothers usually suffer financially from divorce, some research says that in recent years this situation has improved.
How does divorce financially affect children?
The financial burdens of divorce cause children to spend less time with parents, have fewer extracurricular opportunities, lose health insurance, and refrain from going to college.
- Less time with parents. Children with divorced parents spend less time with their parents. A parent who previously stayed at home or worked only part-time may need to work full-time after divorce.
- Fewer opportunities. Children with divorced parents often cannot experience the “extra” opportunities such as music lessons, summer camps, sports, choir, and drama because of strained finances.
- School. Children from divorced homes struggle more in school and are less likely to graduate from high school. They are also less likely to attend college because they lack the financial support to enroll.
- Insurance. Some children will lose insurance coverage, and others will face medical expenses not covered by insurance, such as a chronic illness or orthodontic care.
These public assistance resources may be useful for children whose divorced parents face financial challenges:
How does divorce financially affect men?
Most men experience a 10–40% drop in their standard of living. Child support and other divorce-related payments, a separate home or apartment, and the possible loss of an ex-wife’s income add up. Generally:
- Men who provide less than 80% of a family’s income before the divorce suffer the most.
- On the other hand, men who provided more than 80% of a family’s income before a divorce do not suffer as much financial loss, and may even marginally improve their financial situation.
- Fathers with custody or who share custody of children have additional expenses.
- Often, men’s earnings are “garnished” by the state. In other words, money they owe for child support is taken directly out of their paychecks. One man we know was divorced three times, and most of the money from his paycheck was gone before he got it. He was unable to get his child support orders amended despite his declining income.
TwoofUs and Mint provide more information on divorce’s financial effects on families.
- This exercise will help you understand your finances following divorce.
How might divorce financially affect my community?
The success and failure of our marriages have consequences beyond our personal lives. Society takes on a financial burden when marriages fail.
Divorce is one of the most common ways that people, especially women and children, fall into financial difficulties. When this happens, they become dependent on government programs, services, and supports. Divorce and unwed childbearing cost U.S. taxpayers at least $112 billion each year.
Another study estimated the cost of divorce in Texas alone to be $3 billion each year. These costs are just for public assistance programs (welfare), not the cost of the divorce itself (lawyer and court fees, counseling, mediation, etc.).
In addition, children from divorced homes are more likely to get involved in crime, which pulls apart the threads of civil society. Children from divorced homes also struggle more in school, are less likely to graduate from high school, and are less likely to become productive citizens.
Individuals at the crossroads of divorce help not just themselves and their families, but their neighborhoods, communities, and nation if they are able to repair their relationships and re-establish a healthy, stable marriage.
How do you become Financially Secure after a Divorce?
Some of the steps you should take immediately to try to get back on track financially include adjusting your spending to your new single-person budget; making a plan to deal with any debts the divorce left you with; considering how divorce will affect your taxes and health insurance; and setting some new financial goals. You may also need to work on building credit in your own name if you shared joint accounts with your spouse.
If you’re not sure how to handle all of these post-divorce financial tasks, this guide will walk you through some of the key steps you need to take.
1. Rework your budget to adjust to your new financial situation
For most people, a divorce means you have more expenses to meet with less income. Where you once had two people contributing to one household, now you’re solely responsible for covering all your costs. And you’re reliant on only your income without contributions from your spouse. Even if you are a higher earner, you may have new obligations such as child support and alimony to pay.
You’ll need to make sure your budget fits with your new financial reality, because trying to hold onto old spending habits could quickly lead to financial disaster.
Figure out how much income you’ll have coming in post-divorce and allocate that cash to essential expenses. If you find you don’t have enough to maintain your current standard of living while staying out of debt and saving for retirement, you’ll need to make big changes.
It can be helpful to make these changes sooner rather than later so you don’t continue to spend as you used to and harm your financial security in the process. You may have to sell the marital home, for example, or downsize to a less expensive vehicle if you can’t afford the payments or maintenance.
2. Make a plan to deal with debt
Often, divorce leaves you in debt due to legal bills and other associated costs of ending your union. You’ll want to be proactive about making a plan to deal with this debt as soon as you possibly can.
One good approach may be to refinance the debt. If you put lawyer’s bills on a credit card and are currently paying a high-interest rate, a balance transfer or personal loan could help you to sharply reduce the interest you’re paying on your debt.
You should also work your budget so you send extra payments to this debt to keep the total costs down and get back on track financially. It’s worth making short-term cuts and giving up small luxuries for a limited time. That way you can retire your divorce debt and move forward with more spare cash available once it’s no longer promised to creditors or going towards interest.
3. Work on building credit in your name if you don’t have it already
If you didn’t have credit cards or loans in your own name during your marriage, it’s important you start developing your own credit history ASAP. You’ll need a good credit score when renting or buying a home or when applying for any loans in the future.
If you haven’t ever obtained credit on your own, it may be hard to get approved to borrow post-divorce. Unfortunately, you need access to credit to build credit. That’s because you need to show you can borrow responsibly. If you aren’t able to get a standard credit card, you can apply for a secured credit card.
Almost anyone can get one easily because they require you to make a deposit that’s generally equal to the line of credit. Use your card, make small purchases, and pay off the card on time each month to develop a positive payment history. This is a very important component of your credit score.
If your former spouse is listed on any of your credit card accounts, request to have his or her name removed ASAP so they can’t continue using the accounts. And if you’re still listed on any joint loans with your ex, those should be refinanced into the name of whomever is responsible for paying them. Otherwise, if your ex misses a payment, your credit could be hurt — even if your divorce agreement says you aren’t responsible for the debt.
4. Change your tax withholding
Your tax situation will almost assuredly change after your marriage ends because you can’t file as married anymore.
Depending on whether you can claim your kids as dependents or not, you may either have to file as single or file as head-of-household. Either way, it’s important to adjust the money your employer withholds from your paycheck.
Otherwise, you may have more money being taken out of your check than should be — leaving you with a cash shortfall. Or, you may have too little being taken out and end up with a big tax bill, which is the last thing you need.
5. Explore health insurance options
If you were previously getting health insurance through your ex, explore all your options for getting covered on your own. You may be able to get a plan on the Obamacare exchange that comes with subsidies to help cover your premiums, or you may be able to get signed up for an employer plan where you work.
If you were covering your ex, make sure he or she is taken off your policy so you don’t get stuck subsidizing their healthcare costs (unless your divorce decree requires you to do so).
Whatever you do, make sure there is no gap in coverage for yourself or your kids, as one minor illness or injury could further exacerbate post-divorce financial problems.
6. Look for ways to increase income
When you’re dealing with a downsized budget or trying to pay debt associated with divorce, increasing your income can be extremely helpful.
Look for ways to earn more by learning new skills or picking up a side gig. You can keep busy during your early days of being newly-single by bringing more money into your household. This extra cash will help you become financially stable and overcome any money struggles the divorce is causing you.
7. Set some new financial goals
Now that you are on your own, it’s up to you to set financial goals and make plans to achieve them.
The future will look different than you planned now that you’re divorced. Think about things like saving for retirement and saving up an emergency fund since you no longer have a spouse’s income to fall back on if something goes wrong. You may also want to set some fun goals, such as saving for a vacation, so you have something to look forward to.
Be as specific as possible in setting these financial goals. Start with the essentials, such as becoming free of your divorce debt or rebuilding your emergency savings, and determine how much you need to put towards these goals each month. Then work your budget to prioritize meeting your objectives.
8. Ask for assistance if you need it
If you aren’t sure where to start when it comes to getting your financial life in order, you may want to talk with a financial planner about making a post-divorce financial plan.
Read Also: Do you Really Need a Financial Advisor?
You may also need help from other sources, depending on your situation. There is usually free or low cost legal assistance in most areas to help you recover unpaid child support if your ex isn’t paying. Or, you and your kids may qualify for government benefits without your ex’s income.
Don’t be afraid to use all the resources available to you as you rebuild your financial life. After all, divorce is a major money setback and it can take time to get back on your feet.
Final Thoughts
Divorce ranks as one of the most stressful life events a person can go through. It may be easy to get swept up in settling things quickly, and hastily making decisions regarding alimony, child support and the splitting of assets, without looking 10 or 20 years down the road.
This is where consulting with your Certified Financial Planner will have big pay-offs. They can help you determine the long-term financial consequences of your divorce settlement before it’s too late.
