How Divorce Affects Finances

Updated on May 16, 2017
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Leah Hadley, CDFA, MAFF, mediator and divorce financial planner, is passionate about making the divorce process as painless as possible.

Moving From One Household to Two

There are many of us who have a hard time affording one household let alone two, especially if there is only one source of income. This can be an incredibly difficult realization for couples facing divorce. One or both parties might feel like they "deserve" to live the lifestyle that they have grown accustomed to. If money was tight before the divorce then that's just not possible. A great way to lower household expenses is to downsize. However, lots of individuals do not even want to entertain the idea.

I recently met with a woman whose husband asked her for a divorce. When we discussed her priorities, she said that her number one priority was to keep her house. This is not unusual as I have had this conversation more times than I can count over the years. In this particular example, the woman's daughter was grown. My client was living alone and she was not working. When we calculated the cost for her to stay in her home (including her mortgage payment) she needed at least $6000/month in spousal support. Her husband just did not have the kind of income to be able to support that level of maintenance.

When we calculated her expenses if she downsized to an apartment, she only needed $3500/month and that would still give her more spending money. There were many tears shed over this realization. However, I knew she would be so much better off longer term. She will also receive additional liquid assets when the house sells. Some extra cash will really help her out.

Divorce is Expensive

I have seen lots of numbers thrown around regarding the average cost of divorce. While I don't think anyone truly knows what that number is, I'm going to use $20,000 as an example. I have seen lots of clients get away with getting divorced for a few thousand and others spend tens of thousands of dollars. Where does that $20,000 come from? It's either an increase in debt (e.g., credit cards, home equity line of credit, etc.) or it's a decrease in assets (e.g. money from savings or investments accounts). Regardless of how the divorce is paid for, most divorces have a significant impact on the couple's financial picture. I recommend consulting with a financial advisor to determine the best option to pay for your divorce.

Divorce Can Impact Your Credit Score

This is an important one that a lot of people do not realize. It's always important to protect your credit score so that you are always eligible for the best rates. However, when you are going through a divorce, you may not have complete control over the credit score impact. To understand that impact, it's important to first understand the factors that affect your credit scores. One of the most important factors is the ratio of the amount of debt outstanding to your total available credit. The lower the ratio, the better for your credit score.

If you do not have much credit available to you and you choose to use credit cards to assume debt that is divided as part of the divorce then your ratio will increase. Thus, making your credit score decline. This could cost you a lot if you are also looking at refinancing your car, house or other property.

There is a lot going on when divorcing. It's easy to let things slip, including bill payments. Too many missed payments is the biggest factor when calculating your credit score. Take extra care to make sure all of your bills are getting paid on time.

Understand Your Credit Score

Credit Score Factors

Divorce and Retirement Planning

Divorce can have a significant impact on your retirement plan, particularly if you are divorcing later in life. It can force you to have to work longer than expected. In many divorce situations, pension payments are divided and the pension is often not enough to support one household, let alone two. Likewise, other types of retirement accounts such as 401-K's and IRAs may also be divided in the divorce settlement. Thus, you may need to work for additional years to increase your savings or work part-time in retirement in order to supplement your income. Careful planning is key and should not be ignored when negotiating the terms of your divorce.

You Can Minimize the Impact of Divorce on Your Finances

You have one opportunity to protect your finances through your divorce. Don't waste it or you could pay for it for years to come. If you are not sure how to best prepare yourself, seek advice from a financial adviser who specializes in divorce. With careful planning, you can minimize the impact of divorce on your finances.

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