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What Are The Financial Consequences Of Divorce?

What To Do When Your Divorce Has Turned Ugly
What Are The Financial Consequences Of Divorce?

Divorce is stressful emotionally, mentally, physically, and yes, financially. During a divorce, you and your spouse will be forced to make and accept decisions that have a major impact on your current and future financial situation and security. The most important thing to remember? Don’t go into them uneducated and alone. While many people choose to consult a family law attorney in their divorce proceedings, too few engage the expertise of a financial planner and/or CPA.

Dividing Property in Divorce

When a marriage comes to an end one of the first decisions you have to make is how you’ll divvy up the property you own. Diving property can be as much decided by state law or court-order as it is compromise and agreement between you and your spouse. Currently, there are nine states that are community property states. These states have laws that hold that all assets acquired during the marriage by either spouse are considered joint marital assets. Joint marital assets are generally divided equally between the spouses in a divorce.

Beyond the unique laws in community property states, there are several other routes taken for the division of marital property. Surprisingly, many people come to a relatively amicable agreement about the division of property, but if there is disagreement about one or more items, there are a number of fair methods for deciding who gets what.

One of the most common is bartering, where one spouse takes certain items in exchange for others. For example, the wife may take the car and furniture in exchange for the husband getting the boat. Another method used in the division of property is to sell the marital property and divide the proceeds equally. Often times, mediators or arbitrators may also be used. Be sure to familiarize yourself with the laws that govern the division of property in your state.

When it comes to property like houses, there are specific issues you might want to consider, especially if you want to buy a new house during the course of the divorce. Make sure you find out the legal requirements and restrictions so that you will not end up with the short end of the stick.

Dividing Debts in Divorce

Often even more difficult than dividing the property in a divorce is deciding who will be responsible for any debt the couple has incurred during their marriage. In order to do this, you’ll need to know how much you owe and to whom.

Even if you trust your spouse fully, do yourself a favor and order your credit report from each of the three credit reporting agencies. Your credit report breaks down everything you owe in your name, including joint accounts you share with your spouse.

Go through the credit reports and identify which debt is shared and which is in your spouse’s name only. At this point, it’s important to stop the debt from growing any larger while you’re in the process of getting divorced. The best way to do this is to cancel joint credit cards, leaving one card in your name in case of emergencies. Once you’ve identified your debts and taken steps to ensure they don’t increase, it’s time to decide who will be responsible for what debt. There are several ways to do this, including:
• If possible, pay off the debts now. If you have savings or assets you can sell, this is the cleanest method. You don’t have to worry that your spouse will leave you responsible for his/her portion of the debt, and you can start your new life debt-free.
• Agree to take responsibility for the debts in exchange for receiving more assets from the division of your property.
• Agree to let your spouse take responsibility for the debts in exchange for receiving more assets from the division of property.
• Agree to share responsibility for the debts equally. Though at first glance this choice appears most “fair,” it does leave both of you the most vulnerable. Legally, you are still responsible if your ex-spouse doesn’t pay up, even if s/he signs an agreement taking responsibility for the debt.

Tax Issues in Divorce

People sometimes get caught up in the most obvious and talked about issues of divorce such as the division of property and debt, who will have custody of the kids, etc. As a result, many don’t think through the tax implications of their divorce, an oversight that can cost thousands of dollars or more. This is where a certified public accountant (CPA) comes in very handy as a part of your divorce team. Tax issues that may arise from divorce can include:
• Who will get the tax exemption for dependents?
• Who will be able to claim Head of Household status?
• Which attorney fees are tax-deductible?
• How can you be sure “maintenance” payments will be tax-deductible?
• How can you avoid the mistake of having child support be non-deductible?

Of course, as tax law changes and your unique situation may require special consideration, be sure to also consult a tax professional.

Retirement Plan Issues in Divorce

If your spouse has retirement savings, you are probably entitled, by law, to half. This money can be used for your own retirement or for a down payment on a house, relocation expenses, or other current expenses. To avoid the 10% penalty on early withdrawal, be sure to follow IRS regulations. The primary issue with a division of retirement assets is that while the assets may or may not have been sufficient for your joint retirement needs, more than likely your individual retirement needs will be much greater. As a result, not only must you consider how these assets will be divided, but how you will continue to contribute to them in order to secure your financial future in retirement (even as your near future may be in question as well).

Educate Yourself

Divorce can bring out the worst in some people, and you need to be aware that even the most honest of people may try to cheat when it comes to settling up financially in a divorce. Spouses may underreport income, ask an employer to delay a large bonus or salary increase, among other dishonest behaviors. Most vulnerable are those whose spouse owns a closely-held business.

The best defense when facing the financial concerns of a divorce is knowledge. It is particularly important for both spouses to educate themselves about their joint finances so that nothing remains a secret to be overlooked. In the case of divorce, ignorance is not bliss.

Generally, women suffer more financially than do men from divorce. The financial burden is greatest during the first year after divorce and varies depending on: how much money the woman contributed to the family income before divorce, and the ability and willingness of her former husband to make child support payments.

How Does Divorce Financially Affect Children?

The financial burdens of divorce cause children to spend less time with parents, have fewer extracurricular opportunities, lose health insurance, and refrain from going to college.

• Less time with parents. Children with divorced parents spend less time with their parents. A parent who previously stayed at home or worked only part-time may need to work full-time after divorce.
• Fewer opportunities. Children with divorced parents often cannot experience the “extra” opportunities such as music lessons, summer camps, sports, choir, and drama because of strained finances.
• School. Children from divorced homes struggle more in school and are less likely to graduate from high school. They are also less likely to attend college because they lack the financial support to enroll.
• Insurance. Some children will lose insurance coverage, and others will face medical expenses not covered by insurance, such as a chronic illness or orthodontic care.
These public assistance resources may be useful for children whose divorced parents face financial challenges:
• Nutrition
• Health Care

How Does Divorce Financially Affect Men?

Most men experience a 10–40% drop in their standard of living. Child support and other divorce-related payments, a separate home or apartment, and the possible loss of an ex-wife’s income add up. Generally:
• Men who provide less than 80% of a family’s income before the divorce suffer the most.
• On the other hand, men who provided more than 80% of a family’s income before a divorce do not suffer as much financial loss, and may even marginally improve their financial situation.
• Fathers with custody or who share custody of children have additional expenses.
• Often, men’s earnings are “garnished” by the state. In other words, money they owe for child support is taken directly out of their paychecks. One man we know was divorced three times, and most of the money from his paycheck was gone before he got it. He was unable to get his child support orders amended despite his declining income.

How Might Divorce Financially Affect My Community?

The success and failure of our marriages have consequences beyond our personal lives. Society takes on a financial burden when marriages fail. Divorce is one of the most common ways that people, especially women and children, fall into financial difficulties. When this happens, they become dependent on government programs, services, and supports. Divorce and unwed childbearing cost U.S. taxpayers at least $112 billion each year. Another study estimated the cost of divorce in Utah alone to be $3 billion each year. These costs are just for public assistance programs (welfare), not the cost of the divorce itself (lawyer and court fees, counseling, mediation, etc.).

In addition, children from divorced homes are more likely to get involved in crime, which pulls apart the threads of civil society. Children from divorced homes also struggle more in school, are less likely to graduate from high school, and are less likely to become productive citizens. Individuals at the crossroads of divorce help not just themselves and their families, but their neighborhoods, communities, and nation if they are able to repair their relationships and re-establish a healthy, stable marriage.

Summary Divorce

In many states, an expedited divorce procedure is available to couples who haven’t been married for very long (usually five years or less), don’t own much property, don’t have children, and don’t have significant joint debts. Both spouses need to agree to the divorce, and must file court papers jointly.

A summary (sometimes called “simplified”) divorce involves a lot less paperwork than other types of divorce—a few forms are often all it takes. For this reason, summary divorces are easy to do without the help of a lawyer. You can usually get the forms you need from your state court’s official website, or from the local family court clerk’s office.

Uncontested Divorce

In terms of dealing with the court process, the path that normally generates the least amount of stress is an uncontested divorce. That’s one in which you and your spouse settle up-front all your differences on issues such as custody and visitation (parenting time), child support, alimony, and division of property. You’ll then incorporate the terms of your settlement in a written “property settlement agreement” (sometimes called a “separation agreement”).

Once your case is settled, you can file for divorce with the court. Courts almost invariably fast-track these types of cases, so you can get divorced in a relatively short period of time. In some states, you many not even have to make a court appearance, but rather can file an affidavit (sworn statement) with the court clerk.

Default Divorce

A default divorce occurs when you’ve filed for divorce, and your spouse doesn’t respond. You’d likely see this, for example, if your spouse has left for parts unknown and can’t be found.

Assuming you’ve complied with the court’s rules and regulations, a judge can grant the divorce despite the fact your spouse hasn’t participated in the court proceedings. On its face, this may seem like the ideal situation. No one is there to contest what you’re asking the court to give you. But be aware that there are pro and cons to a default divorce.

Contested Divorce

If you and your spouse are at loggerheads over one or more marital issues, to the point that you can’t come to an agreement, then it will be up to a judge to decide those issues for you. This is what’s meant by a contested divorce.
Contested divorces are stressful, time-consuming, and expensive (think mounting attorneys’ fees). You’ll go through a lengthy process of exchanging financial and other relevant information, mandatory settlement negotiations, and court hearings for temporary relief, such as interim alimony, for example, if warranted. And if you can’t resolve the case after all that, there will be a court trial. The burdens of a contested divorce are why the vast majority of divorce cases ultimately settle at some point before trial.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506