After custody concerns, one of the most common things that people worry about when they’re getting divorced is how the divorce will impact their financial situation. When you divorce, not only are you losing any part of the household income that your spouse contributed, you may also lose assets that you and your spouse previously shared or be required to make payments to your spouse. If you were a homemaker or stay-at-home parent, you may be wondering how you will support yourself without your spouse’s income, and wondering if you’re entitled to anything from your spouse to help you get back on your feet. Take a look at some of the financial risks of divorce and how to navigate them.
Direct and Indirect Impacts of Divorce
It’s important to realize that divorce has both direct impacts on your finances (loss of your spouse’s income and division of assets) and also indirect impacts (changes to your tax status, for example.) You may not be able to anticipate every possible effect that the divorce might have on your ability to support yourself going forward. For instance, if you and your spouse are parents, you may have saved money on childcare expenses by working opposite shifts or otherwise arranging your schedules around each other. If you’re the parent that the children live with, you may now need to pay for childcare. And even if you’re the noncustodial parent, it’s possible that you may have to contribute financially to your children’s daycare expenses.
It’s also important to remember that the divorce itself will cost you money upfront. Even leaving legal expenses out of the equation, it costs money to file the divorce paperwork, and other administrative tasks, like obtaining certain documents, may cost money as well. Even if you represent yourself in court, the court fees and other costs add up. For some people, these costs are not a problem, but for others, they can be a major obstacle.
If possible, it’s a good idea to talk to a financial planner about how divorce will change your financial status. After having seen many different financial situations, an experienced planner might be able to anticipate how your financial standing and future will change after the divorce better than you can – for example, they may be able to predict what kind of effect the change from “married” to “single” will have on your tax returns. It’s also a good idea to start looking for ways to save money, such as by using a legal resource group to represent yourself instead of hiring an expensive family law attorney if your divorce is uncomplicated.
Division of Assets
Marital assets include things like houses that you own, cars, boats, bank accounts, stocks and bonds, mutual funds, retirement plans and college funds, artwork, antiques, and other valuables or collectibles, life insurance policies that have a cash value, and frequent flier miles. Your debts will be divided as well, so things like mortgages, credit cards, student loans, home equity loans, and lines of credit are also on the table.
How these assets and debts will be divided depends largely on the state that you’re located in. Community property states divide marital assets equally between divorcing spouses, while states that are not community property states strive for “equitable division” of assets, which is not the same thing as equal division. Equitable division essentially means that courts will try to divide assets in the way that’s most fair to everyone involved, even if that doesn’t result in a 50/50 split. There are only nine states that are community property states, but they include several large and populous states like California and Texas, so community property laws still affect a lot of divorcing couples. Knowing whether you’re in a community property state or an equitable division state will help you understand how your assets and debts might be divided.
It’s also important to understand which of your assets are marital assets. Generally speaking, marital assets are any assets acquired over the course of the marriage, with a few exceptions. Separate property includes things that the individual owned prior to the marriage, inheritances bequeathed to one spouse only, and gifts made to one spouse only. However, gifts, inheritances, and assets brought into the marriage can become marital property if they’re intermingled with the marital assets or if the other spouse contributed to those assets in some way.
New Financial Obligations
Divorce can also bring some new financial obligations, such as spousal support. Whether or not you’ll pay or receive spousal support depends on several factors – where you live, how long you were married, what your financial situation is relative to your spouse’s financial situation, and your ability to earn a living going forward.
In most cases, spousal support is a temporary measure. So, if you’re ordered to pay it, it will impact your finances, but not permanently. And if you’re on the receiving end, you won’t be able to count on spousal support as part of your income forever. The purpose of spousal support is to give a non-earning or low-income spouse a buffer while they get back on their feet financially after the divorce. However, courts also take the income of the earning spouse into account too – if both spouses are low income, there may be no spousal support ordered, or only a small amount of spousal support ordered.
New financial obligations, like spousal support, the loss of assets in the division process, and various indirect effects of divorce are some of the financial risks that you run when you begin the divorce process. In many cases, couples are able to negotiate for the assets they want and the support they need and come up with a mutually agreeable arrangement. That can help to mitigate the indirect impacts that a divorce can have on individual finances. In other cases, the courts must settle the financial questions. A legal resource group like National Family Solutions can help you represent yourself in court and negotiate in your own best interests. This can help you avoid or minimize the negative impact of divorce on your finances.