Divorce describes not only the end of a marriage but a complex, often months-long process that usually involves countless emotional and financial challenges. Splitting up means disassembling a life together and dividing up assets like homes, cars, and debts. If a couple has children, then the emotional and financial consequences of divorce are much higher.
While it's hard to gauge a typical divorce's "cost," even low-conflict divorces run into the tens of thousands of dollars, with the US average between $15,000-30,000 per person. And in high-conflict situations, namely, those that involve a custody dispute, the price can easily soar higher.
The article describes the costs involved in the divorce process and how this stressful procedure impacts the personal finances of two parties.
Why Are Divorces So Expensive?
The divorce process is an expensive procedure due to the various considerations involved. When separating from your spouse, you need to pay fees to a divorce attorney and court costs. You will also face the need for financial and sometimes custody evaluations, dividing marital assets and debts.
In many cases, people also overpay for the length and complexity of the divorce settlement process. Some situations also require the rental of expert witnesses or consultants, which can be costly. Especially challenging cases are those where a household income will drop by 40% or more, and living expenses will rise. Here, the financial adjustments post-divorce worsen the overall economic effect of the divorce.
It is now surprising that divorces are especially costly for women, who usually experience a more significant fall in household income than men. So, various emergency loans for single moms helping mothers to overcome financial challenges. The main advantage of this funding option is that it does not require collateral. This means single mothers don't risk losing their property if they default to pay off the debt.
How Does Divorce Affect Finances? 8 Ways
You should be prepared for numerous financial issues in divorce, as it significantly affects your finances and leads to various challenges requiring well-thought-out solutions. Considering the following issues can help you move toward a better financial future after the split.
#1. Your Health Insurance
If you were covered under your spouse's health insurance plan during the marriage, you could need your own insurance after a divorce. This is especially problematic if you obtain it through your ex-partner’s employer, and you are out of work, or your job doesn't have an insurance plan.
This situation is more common than many might realize. A significant percentage of individuals are temporarily without insurance after a divorce. Exploring options such as the Affordable Care Act Health Insurance Marketplace is essential.
While insurance from the marketplace can be much more expensive than that from your spouse's employer, it's better than having no health coverage.
A financial advisor may also recommend purchasing a life insurance policy for the person paying child support or alimony. This step can help you ensure financial stability in case something happens to your ex-partner.
Being prepared for this change in advance and knowing your health insurance options is the best way to ensure that you will not be without health insurance for long after a divorce and provide you with more financial freedom.
Being prepared for this change in advance and knowing your health insurance options is the best way to ensure that you will not be without health insurance for long after a divorce and provide you a little more financial freedom.
#2. Child Care Costs
Managing your children's care costs after a divorce can be a significant financial challenge. Child support payments from one spouse and the other’s salary usually do not cover all the associated expenses, and the minimum child support amount varies wildly from state to state in the U.S. It's critical that you're prepared for these expenses and can manage them.
Your ability to look after your children's needs and interests depends on it. If your salary is restricted and the financial support from your ex-partner is not sufficient, investigate assistance programs like the Supplemental Nutrition Assistance Program (SNAP) for your nutritional needs, and also have a plan for additional expenses like sports or summer camps. If you're prepared and you actively seek financial help when you need it, you can handle these expenses without too much drama.
#3. Credit Score
Divorce does not affect individuals’ credit but forces them to do things that indirectly affect their credit scores. When people get divorced, they may end up not making their payments. For example, if someone's ex is ordered to make a car payment and they don't make it, then the person's credit is going to take the hit.
Everything from a mortgage to a credit card debt is "joint debt" and still needs to be paid off. If one spouse does not pay their share, their credit reports will be affected. People will also no longer be considered authorized users for their partner's credit cards. Someone's credit utilization ratio, which is their debt divided by their credit limit, could increase. If that happens, their credit score will likely go down.
Even though they're no longer together, people may want to consider checking their credit reports and see how the accounts can be reported separately. After divorcing, people may want to freeze their credit so that no new accounts can be opened and then close their joint accounts. However, it can just hurt their credit scores.
#4. Higher Housing Costs
The clear thing is that living alone is more costly than sharing an apartment with your spouse. Housing costs usually double after divorce, as you need to manage mortgage or rent payments with all of the bills without anybody’s help. So, be prepared that the biggest part of your money will be spent on housing.
#5. Tax Implications
Divorce can affect your tax situation in various ways, including tax implications for splitting your spouse’s retirement plan. A qualified plan will be divided up under one of the following approaches:
1) They may be cashed out (potentially with immediate tax effects);
2) They may be left in your or your spouse’s plan;
3) The assets can be rolled over into your retirement plan.
Your filing status can also change the tax you pay. If you no longer have custody, you lose those exemptions and could have to pay more to the government. That’s why working with a tax professional during a divorce is crucial to help you make sense of the new rules and establish the guidelines to avoid tax problems.
#6. Attorney Fees and Court Costs
The cost of divorce proceedings, including court fees and attorney costs, can vary widely based on the nature of the split. Some couples can significantly lower legal costs by parting amicably.
Known as cooperative or "kitchen table" divorces, these arrangements allow couples to neatly agree and eliminate red tape between themselves. This involves drafting the settlement personally and reducing attorney interference. Still, cases of contentious divorce (especially ones involving complex financial or custody issues) require professional representation to ensure fairness and individual rights. Deciding to split amicably can save a lot of money, but a lawyer is often an essential backup when the arrangement is less than harmonious.
#7. Retirement Plans
Retirement accounts like 401(k)s and IRAs are often considered individual savings. In divorce, they are treated as marital property and are typically subject to division, often through a Qualified Domestic Relations Order (QDRO).
How these assets are divided specifically will vary depending on state law and the duration of the marriage. In many cases, individuals married for more than ten years may be eligible to receive a portion of a spouse's Social Security benefits.
Divorce near retirement age can significantly complicate retirement planning and may require a reassessment of savings strategies and goals. Divorce near retirement age can significantly complicate retirement planning and may require a reassessment of savings strategies and goals. After a divorce, various budgeting and savings tools can be helpful ways to manage and track retirement savings.
#8. Monthly Budget
It is not news that divorce usually has a more significant financial impact on a woman than a man. That's usually the case only because around 95%t of the time when there's a divorce, the woman becomes the "custodial parent" taking care of the kids. Child support, of course, only goes so far.
Incomes in single-parent households drop, but women's incomes drop more, on average than men's. For the same reason, singles generally have more financial problems than married, but single moms more than single dads.
Financial Issues in Divorce: How to Divide Your Jointly Owned Assets?
Each certified divorce financial analyst will tell you that dividing jointly-owned assets is often the most difficult and unpleasant thing in the divorce process. Key areas include financial assets, real estate, child/spousal support, debt, and tax implications.
Financial Assets
This area includes your bank accounts, life insurance, retirement plans, mutual funds, pensions, etc. Dividing these assets may be especially challenging if one spouse does not work.
Property
In the United States, most states are "equitable distribution" states, while others follow "community property" principles. In the second group of states, assets and debts acquired during the marriage are divided 50/50. In equitable distribution states, the property is divided fairly but not always equally. The court will consider such factors as each spouse's economic circumstances, the duration of the marriage, and any contributions made by the spouse to marital assets, among others.
Debt
Debt responsibility in a divorce typically follows from whose name is on the loan or account. For individual debts, the person whose name is on the account is usually the one who is liable. For most joint debts, both parties are affected by the debt.
Joint debts may have to be split by the court, a process which, itself, can be full of problems. In the meantime, be sure you keep paying at least the minimum due on all bills until the settlement is final in order to protect your credit rating.
After you have paid off the joint debts, you should close all joint credit card accounts following the creditor’s procedures.
Spousal Support
Spousal support in a divorce is often determined when there's a significant income disparity between spouses. It may be temporary or cease if the recipient remarries. Alimony factors include marriage duration, each spouse's contributions, income needs, employability, asset division, health, and support for children or elderly parents. If a shared business is involved, the court typically awards it to the spouse managing it, possibly compensating the other spouse.
Child Support
After divorce, one spouse may be required to pay child support, which generally continues until the child turns 18, with considerations for future expenses like college tuition. It typically hinges on the parent's income, and the individual receiving the payments does not have to pay income tax on the money, and the individual paying the funds can't take it as a tax deduction. However, you could be eligible to claim a child tax credit and an exemption for the child on your tax return.
The Bottom Line: Financial Problems after Divorce
Divorce is often an even more expensive process than marriage, with a lot of unexpected costs and stress. Many couples consider working with a financial professional to protect their assets and prepare for their future single lives. However, the more informed you are about the divorce proceeding, the easier it will be for you to deal with the split from your ex-partner.
