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 be financially damaging. Your income may be affected, and it's possible that you could find yourself leaving the marriage with high debt. Knowing how best to protect yourself can potentially make divorce less expensive and perhaps a little less painful.

What are Your Financial Obligations: Child Support and Alimony

One of the central financial issues of divorce involves the payment of child support and/or alimony. Child support payments are calculated by the state in which the divorce was granted and most state guidelines account for things like each parents' income, the number of children and the custody agreement reached. 

If you're ordered to pay child support as part of your divorce agreement, you're legally obligated to pay it. Child support can be reviewed and adjusted periodically, but you should be considering how these payments will fit into your monthly budget. 

Another potential financial obligation in a divorce may be spousal support. Alimony is separate from child support and is generally seen as a temporary measure to aid the spouse who may see their income shrink dramatically after the divorce. Spousal support typically has a specific end date, as does child support. Again, these are payments that would have to be incorporated into your budget post-divorce.

You'd also need to consider your budget if you'll be receiving child support or alimony. These payments may be necessary to cover your day to day living expenses but if you're able to meet all of your bills with your current income, child support or alimony may be "extra". You'd then have to decide how to best allocate that money. For example, you may use child support to fund 529 college savings accounts for your children or create an emergency savings cushion with alimony payments. Remember also that alimony has to be reported as income on your taxes, whereas child support does not.

 

Division of Property in a Divorce

Unless you have 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 doesn't 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:

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

You'll also want to be aware of any joint debt or liabilities.That might include the mortgage on your home, home equity loans or lines of credit, student loans, credit cards, car loans or loans that you applied for jointly. Just like assets, liabilities may also need to be divided in divorce

Direct and Indirect Financial Impacts of Divorce

Divorce can have a significant impact on your financial outlook. In many cases, it's worthwhile to spend the money to consult a financial planner to assess the real value of your assets, determine who's responsible for marital debts, take tax consequences into consideration and get general financial planning advice prior to a divorce settlement.

You should also consider the cost of the divorce itself. Hiring an attorney can become expensive if you and your soon-to-be former spouse aren't able to agree on things like custody arrangements, child support or the division of assets. Consider how the cost of dragging out a divorce could affect you over the long-term if you're saddled with a sizable attorney bill afterward. 

How to Protect Yourself Financially in a Divorce

A prenuptial agreement can offer financial protection to both spouses in the event of a divorce but if you were married without one, your next best line of defense is knowledge. While it's 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. Spouses should be aware of their debts, investments, family income and any other assets, including how they're titled.

If it's clear that a divorce is in the making, it may be wise to close any joint bank accounts and open individual accounts. You may want to consult your attorney first before taking assets from a joint bank account. Cancel any joint credit cards you've opened and get new ones in your own name only to prevent your spouse from incurring new debt under your name. 

When your divorce is final and assets have been legally divided, change names on house deeds, stocks and bonds, and car titles as needed. Remember to change the beneficiaries on your investments, retirement plans, life insurance policies, and savings accounts, and 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 and continue to monitor your credit report and score regularly. 

Divorce can be devastating financially to one or both parties, but it's possible to get through it with your finances intact. Educating yourself and taking a few precautions can reduce the financial impact on you and your children.