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What are the financial implications of getting a divorce?

divorce and money
August 27, 2016

By Thomas Muellner

It’s hard to even imagine. To think that after making the biggest commitment of your life in marriage, you’d need to start from scratch. However, while divorce rates are declining in the United States, roughly one-third of marriages still end with husband and wife parting ways. 

This can put both sides in a bind financially, adding extra stress to an already trying situation. From paying bills to maintaining credit, divorce and financial problems all too often go hand-in-hand. 

If you’re going through the difficult process of separating from a spouse, keep these personal finance tips in mind. Being conscious of these core financial issues related to divorce can help soften the blow and be a first step down the long road toward resolution. 

Bracing for an immediate strain 

Divorces can take months or even years to sort out, but that doesn’t mean the financial impact is delayed. In reality, it actually equates to a sharp and immediate increase in your personal living expenses.

From housing and transportation to groceries and utility bills, the day-to-day expenses you previously shared with your spouse are now completely on you. Be aware of this jump and work to pare down your monthly bills as much as possible (e.g., put the Netflix account on hold, take public transportation to work, etc.), especially if you’re worried you’ll need to tap into savings or other investments to make ends meet. While bittersweet, it can be a good time to take stock and reset with a new monthly budget.

Additionally, if you and your spouse have shared bills – accounts that are formally attached to both of you – know that you’re each still liable for payment. Though tensions can be high, it’s in your best interest to keep these shared accounts in good standing. Failing to do so may result in extra fees and interest, as well as negative marks on the personal credit scores of both you and your former spouse. 

Sharing assets… and debt

One of the major benefits of marriage is increased buying power. Having a joint household, particularly when both individuals work, creates stability and offers a strong foundation to build wealth.

However, this also works in opposite fashion; couples who have debt, even if it’s primarily from one party, share that debt in marriage and divorce. It’s a burden that’s often split fifty-fifty. Because of this, you may be on the hook for a hefty sum if student loans, credit card debt and other liabilities leave you and your spouse with a negative net worth.

Liquidating assets (down the drain)

It may seem like a no-brainer to sell off assets shared by you and your spouse so you can divide the profits evenly, but resist the urge. Liquidating assets without proper planning can result in a huge tax bill that causes both spouses to suffer a financial hit, so be sure you understand the implications. 

Before you start cashing in bonds and selling investments, realize that any assets you’ve held for more than one year may be subject to a capital gains tax of up to 15 percent come April. Moreover, if assets are specifically designated for retirement purposes, such as 401(k) and Roth IRA accounts, you’ll also be responsible for an additional 10 percent tax penalty for withdrawing funds ahead of schedule.

Alternatively, transferring or dividing ownership of assets without liquidation can mitigate tax liability. Though it’s not as cut-and-dry as straight cash, the benefits of this type of arrangement may outweigh the flexibility of liquidity. 

Calculating spousal support

In addition to legal fees, newly acquired debt, and individual living expenses, you may be ordered to pay your partner spousal support once your divorce is finalized. This is generally done to balance the financial standing of both parties if one individual earns significantly more than the other.

So, if you make six figures and your spouse only works part-time, there’s a good chance you’ll be required to make up at least part of the difference of your once-shared income.  

Depending on your specific situation, spousal support can be required to be paid on a short-term, long-term or indefinite basis. As a general rule of thumb, the longer you’re with your partner, the more likely you are to pay spousal support for an extended period of time. Conversely, marriages that last fewer than five years may resolve without either individual being awarded compensation. 

However, because divorce laws vary from state to state and judges have significant discretion in the final dollar amount awarded, it’s not easy to budget for this extra expense. Start by learning about the spousal support laws in your state and try to plan from there.
 

There’s never a good way to end a marriage, but by taking proactive steps to understand the financial implications of divorce, you can make the best of a tough situation and set yourself up for brighter days ahead.