How to Deal with the Financial Impacts of Divorce

Be Prepared: Know Your Financial Obligations and How to Protect Yourself

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Arguably the most devastating cost of divorce is its effect on the family, but divorce can also very costly financially. Some researchers estimate that divorced spouses would, on average, need more than a 30% increase in their income to maintain the same standard of living they had prior to their divorce. Knowing your rights and obligations and ultimately how best to protect yourself can make it less expensive and perhaps a little less painful.

What are Your Financial Obligations: Child Support and Alimony

If there are children involved, their well-being should be both of the parent's primary concern. Unfortunately, this is not always the case. Former spouses paying child support sometimes feel that the custodial ex-spouse is "squandering" the child support money, or that the mandated child support is exorbitant. Though child support payments are calculated by the state in which the divorce was granted, most state guidelines attempt to account for factors like both parents' incomes, the number of children involved, and custody and the amount of time each parent spends with the children. 

Despite a parent's legal obligation to pay court-mandated child support, only half of all court-ordered child support in the United States is actually paid, and only half of that is paid in full. If child support is part of your divorce agreement, you are legally and morally obligated to pay it.

 In the event of some significant change in one parent's financial situation (such as the loss of a job) or a change in the custody agreement, the amount of child support may be reviewed and adjusted.

Another potential financial obligation in a divorce may be spousal support or alimony. Though alimony can be financially life-saving for the spouse to whom it is granted, it can be equally devastating to the spouse who must pay it.

In the absence of a prenuptial agreement, alimony is separate from child support and is generally paid to the less-advantaged spouse. Though it is generally seen as a temporary measure to help one spouse "stay on their feet" during and immediately following the separation, how alimony is calculated is surprisingly subjective and not only varies from state to state, but from court to court. To best avoid an extremely unfair ruling in terms of potential alimony, some professionals suggest avoiding the court altogether and opting for alternative dispute resolution methods like mediation or arbitration. But in man divorce proceeding, these methods simply won't work.

Division of Property in a Divorce

In the absence of a prenuptial agreement, the laws in your state determine how your assets are divided in a divorce. A total of nine states (AZ, CA, ID, LA, NE, NM, TX, WA, and WI) are community property states, which means assets acquired during the marriage by either spouse are considered joint marital assets and will generally be divided equally in a divorce.

The remaining states are based on "equitable distribution," which does not necessarily mean an "equal" distribution. The court will consider many tangibles and intangibles in coming to a decision on how to divide assets.

What are Your Marital Assets?

Before going to an arbitrator, mediator, or attorney, you should do your homework. List your marital assets and get appraisals where necessary (art, antiques, etc.). You will want to have a handle on the values of the assets like those listed on the following list. You'll also want to be aware of any joint debt or liabilities.

  • House
  • Cars
  • Boats
  • Retirement plans
  • Cash value life insurance policies
  • Stocks, bonds, mutual funds
  • Stock options
  • Tax refunds
  • Accumulated vacation pay
  • Frequent flier miles
  • Loans to others
  • Artwork or antiques
  • Collectibles, tools

Calculate how much child support will be needed to cover food, housing, daycare, clothes, school supplies and activities, and other expenses. Get written confirmation from your spouse's employer of your spouse's salary, vacation balance, bonuses, and stock options. Have a good idea of your spouse's income potential by researching what his or her profession pays for more experience, and what benefits are typical.

Direct and Indirect Financial Impacts of Divorce

Divorce can have more of a financial impact on your future than buying a house or planning for retirement. Don't willingly give up what you have a right to, especially if you have custody of children as your financial situation will directly impact them as well. In many cases, it's worthwhile to spend the money to consult a financial planner to assess the real value of your assets, taking tax consequences into consideration, and to seek financial planning advice prior to a divorce settlement.

If you and your spouse can't come to an amicable agreement about the terms of your divorce, you will each most likely consult an attorney. You may, however, want to consider mediation or arbitration, which are less expensive than using an attorney to settle your differences and don't require court appearances.

How to Protect Yourself Financially in a Divorce

The single best way to protect yourself from the financial effects of a divorce is prevention, which in the case of marriage either means staying married or executing a prenuptial agreement. When neither of those are feasible options, the best protection is knowledge. It is an unfortunate, but real concern that in most traditional heterosexual relationships, the man tends to know more about the family's financial matters than his wife. While is it always important to act as partners in marriage particularly when it comes to finances, it's especially important for each spouse to educate themselves about finances in the event of a divorce. In any marriage, both parties should understand their tax returns and stay informed of their debts, investments, and family income and any other assets including how they are titled.

Once it's clear that a divorce is in the making, cancel any joint bank accounts and open individual accounts. Cancel all credit cards and get new ones in your own name. Close all unused credit accounts, and notify your creditors of your change in marital status.

When your divorce is final and assets have been legally divided, change names on house deeds, stocks and bonds, and car titles, as necessary. Change beneficiaries on investments, retirement plans, life insurance policies, and savings accounts. Don't forget to update your will. Check your credit report to make sure your spouse hasn't incurred debts in your name since your divorce or separation.

Divorce can be devastating financially to one or both parties, but educating yourself and taking a few precautions can reduce the financial impact on you and your children.

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