Understanding the Financial Impact of Divorce
Outside of death and disability, what can be more stressful and damaging to your social relationships, living situation, and your finances than going through a divorce? It is never an easy process, though it is far more difficult when children are involved.
A major life event, divorce is exceedingly common, with 40% to 50% of first marriages being dissolved over time. Interestingly, financial issues or debt was cited as a significant factor in 20% to 40% of all divorces (depending on the source).
The financial impact of divorce can be significant and it will affect both spouses. Here are a few basic financially related facts for those considering or involved in divorce proceedings:
Greater Income Needs. Both parties to a divorce will need significantly greater income to maintain their standard of living. When children are involved, child support payments can be substantial and may require additional sources of income.
The 50:50 Split. Unless there is a prenuptial agreement in place, assets will be split 50:50. That means no one really wins (or loses). The key to the least-stressful (and perhaps most successful) divorce proceeding is compromise. And negotiation may be needed to arrive at compromise.
Living Arrangements. Divorce will affect home ownership, and of course, living arrangements. A home that is not rented is considered property and it may be part of the negotiation (or result in the need to sell). Regardless, other living arrangements will almost certainly be needed for one of the soon-to-be former spouses and/or children, adding further financial burden. Also, a former partner’s name may need to be removed from the deed or loan, which can be achieved through refinancing the loan.
Business Assets. Owned businesses are also subject to the divorce process. If one party owns a business (or share of a business), the valuation of that business share will be subject to the asset split.
Future Assets. Future assets (like pension payments that kick in later, retirement plans, life insurance plans) are also subject to a 50:50 split but can be negotiated. In a simple case, an agreement may worked out where one spouse keeps the house whereas the other spouse keeps their entire pension or 401K savings.
The Direct Cost of Divorce. Divorce has another significant financial impact: the divorce proceeding itself. Divorce is associated with hefty attorney fees, filing fees, courtroom expense, process servers, and real estate and business valuations. The total cost can easily be over $10,000.
At Isakov Planning Group, we understand the painful process of divorce and can fully advise on its implications for your (and your former partner’s) financial picture. We can help you plan how your financial assets are used and divided, or advise you during the negotiation process. If a divorce is in your future, contact us today for a stress-free consultation.