One of our friends is going through divorce proceeding. The incident triggers some thoughts on financial implication of a divorce. In this post I’ll go over the financial matters that every couple going through a divorce should be familiar with.
Divorce is emotionally exhausting experience, and a financially draining one as well. Suddenly, years of jointly earned income now needs to be split, and although it’s unlikely to deter couples who have decided to divorce, the financial implications can affect the rest of your lives. Here are some of bigger financial aspects of divorce to keep in mind.
Per Utah State University – Researchers estimate divorcing individuals would need more than a 30% increase in income, on average, to maintain the same standard of living they had prior to their divorce. About one in five women fall into poverty as a result of divorce. Three out of four divorced mothers don’t receive full payment of child support. Most men experience a loss in their standard of living in the years after a divorce, as well, a loss generally about 10%–40%, depending on circumstances.
Financial implications of a divorce
To start with, have a financial assessment. List of your combined assets, including bank accounts, investments accounts, retirement accounts, primary home value, real estate investments, personal properties like car, etc. Try to determine what each item is worth now and what it cost when you bought it.
Also, include debts that you have. Also, note the names on all accounts, and how the title is held. With this information, your next step is to determine which assets and debts are available to be divided in the divorce, and your prenuptial agreement, if you have one, is the place to start for this.
Couples make various financial mistakes during a divorce, that adds more emotional shock to them. So be prepared and understand what it takes to have a divorce. Make sure you avoid financial disaster that many face after divorce.
The legal fees
Attorney fees can add up very quickly, due to there being not one but two legal teams at all times. Even the most amicable, do it yourself divorce can still cost over $1,500, but most divorces are not going to be all that amicable.
The more a couple fights, the more time will be spent in court, hence the importance of quality legal services. A good resource is a Certified Divorce Financial Analyst, someone who analyzes your assets and situation, and will help with the separation in a way that makes financial sense for both parties.
Finding a lawyer
While ultimately the lawyer you use is your decision, there are ways to find out if they’re the right fit for your case. For starters, the more research the better, and this starts with finding at least three potential attorneys.
This is a trying time in your life, but to them it’s a business. So if they give guarantees or brag about their high-profile clients, you might want to take a step back and reassess their qualifications. Your livelihood is at stake here, and you want to put it in the hands of someone you trust.
I’d say you communicate and resolve matters with your partner as much as possible and try to arrive at a settlement without a lawyer. You’d need a court approval on your settlement anyway, but you may avoid high lawyer fees by reaching at agreement without external influence. a mediator whom you both respect and confine with can be of immense help as well.
Remember the alimony
One financial aspect that is often overlooked is alimony, or “spousal support.” For the uninitiated, alimony is a stop-gap solution, where money is paid to the less advantageous spouse to help them during the split.
It’s also a case of how important quality legal services are, since the money paid in alimony is very subjective, differing from judge to judge. If alimony is awarded, the paying spouse could be on the hook for years and years to come.
Division of assets
You may need to have a QDRO (qualified domestic relations order). A QDRO is a court order that gives you right to receive all or a portion of the benefits payable under your ex spouse’s retirement plan.
This is a very sensitive subject, you must read and be prepared to face a demand or make a demand for your spouses retirement account.
Except properties that you get by inheritance or as a gift are off limits for your partner to get a hand on to. After divorce. For other properties, make sure your name is there in all titles and deeds for you to be considered as a owner during a divorce.
If you do not have a prenuptial agreement, all physical properties can be shared with your soon to be ex spouse, otherwise.
This depends on your mutual decision and court order. If you have to sell an investment, you’ll bear the loss or capital gains tax. Either way, breaking an investment account leads to devaluation of jointly help investments.
Even if a divorce decree says that all credit cards which you jointly own belong to one person, still if your ex partner fails to payoff debt then your credit will also get affected. Same is the case with mortgage.
Keep an eye on the credit card bills and if your partner opens up a new line of credit while divorce proceeding is underway.
Experts say a better strategy is to close such joint accounts after paying off the outstanding debt. At least you should closely monitor the statements.
Learn to manage finances
Managing money poorly is one of the most significant outcome of fallout of a marriage. Lack of financial knowledge often sends individuals in financial disarray after divorce.
Especially if you’re does all the financial work. After marriage you’ll be on your own and managing your finances. So better start learning about personal finance now. Without financial knowledge you will be swimming out in the ocean without life support.
Remember the taxes
If you have filed a joint return thus far, you need to now file as individual. I suggest you hiring a tax consultant to help guide you through the filing process, even if you have filed your return on your own before. Women should pay more attention to tax laws and claim all possible deductions that may apply to you.
Divorce may require you to break your investment accounts. So keep an eye on long-term capital gain taxes that you’ll have to pay. If you break your 401(k) or IRA accounts, you may have to pay penalty.
There are certain deductions that you need to consider. For example, if you require to pay alimony after a divorce you can claim that towards deduction. The partner receiving alimony, has to bear more taxes on the amount.
Above all else, keep your head up. Yes, money will be a bit tight for the future and it’s a big change in lifestyle, but with proper communication, the process can be a little less painless.