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Last Updated: 6th April 2022

The Financial Implication of Divorce: Everything You Need To Know

Divorce has been a subject of debate for centuries, and it even permeated the laws of different religions in the world. Just as humans have started making rules to bind people with marriage, divorce exists to dissolve that bond. As for modern society, divorce has integrated itself into serious discussions, not only as a socio-political issue but also as an economic one.

Written by: Big Piggyy

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Divorce is considered a leading cause of poverty among women, especially mothers, because of higher vulnerability. This amounts to women being twice as likely to fall into poverty than men after a divorce. This article will explore the financial implications of divorce and how important it is to make the right decisions when faced with the circumstances.

 

 

Financial Effects of Divorce

While there are a lot of factors in a divorce that can determine its financial implications, there are a few basic things that are worth considering. This part of the article lays out the link between divorce and economic stability and its effects on all parties involved in the separation.

 

Economic Stability

Despite divorce being a constant subject in discussions involving religious practices and culture, it is also deeply rooted in a family’s economic stability. Nowadays, the law surrounding marriage makes it possible for either side of the divorce to suffer inequality. Still, studies show that it is almost always the women who suffer from falling below the poverty line.

 

In a divorce, both parties sustain heavy consequences because of the division into two households – each with weaker economies. This is a problem for those who didn’t get custody, since they have to pay child support, aside from their expenses. Not to mention that the legal process of the divorce can take a long time, and it will require them to pay with a large percentage of their incomes. Ultimately, parent-child relationships will often end up fractured after a divorce. This is because each parent will face two significant conflicts: having to live with the thought that they are legally bound to spend less time with the child, and having to deal with their own damaged relationship with the former spouse and this takes a toll on their mental health.

 

Women

We have established earlier that women are generally more likely to fall into poverty after a divorce. Now, we will explain the circumstances of that being the case in most divorces. This topic can be complicated since there are a lot of factors to consider about who gets to keep most, if not all, of the financial assets after the divorce is successful.

 

The dividing of financial assets between two parties depends mainly on how much one party has contributed to the economic condition of the marriage. One in five women falls into poverty after a divorce, and this circumstance is primarily due to the unwillingness of men to pay for child support. Gender roles also play a part, as men are the expected providers of the family; thus, they likely have contributed the most income during the marriage. Consequently, it gives them the right to take all the financial assets after the divorce.

 

Men

Divorce can also affect men financially as the child support expenses are already taken directly out of their paychecks. Men who contribute to less than 80% of the family’s income suffer the most after a divorce, but those who contributed more than that percentage will do well, albeit still would suffer a major financial loss. Generally, though, men suffer a 10% to 40% drop in their standards of living.

 

Children

Most importantly, children are the most affected financially after a divorce. Aside from not having the opportunity to spend much time with their parents because of the separation, they suffer fewer opportunities than they would have when under legally married parents. In addition, some children will also lose insurance coverage upon the conclusion of their parents’ divorce, leading to a life with no financial safety nets from the massive hospital bills and other insurance coverage.

 

According to Child-Encyclopedia’s study on the consequences of separation and divorce, children were found to be at risk of having psychological, academic, and social problems, even after entering adulthood. In addition, adolescents who experienced parental divorce are shown to experience emotional distress frequently. However, separation and divorce alone aren’t the factor of negative outcomes to a child, but rather the parents’ ongoing conflict even after the divorce has happened. The child also often experiences a level of disconnect with the non-residential parent, making child functioning much more challenging and, in turn, affects them physically, mentally, and emotionally.

 

Emotional distress, in turn, can distract the child from focusing on their academic goals and will often end up aiming only for lower test scores. Behavioral issues at school are one of the many symptoms that a child might be emotionally suffering the consequences of divorce. This often translates to having a more vulnerable emotional health, making them susceptible to using drug-related problems to cope.

 

Community

There are government programs that provide social welfare for single parents. However, these do not guarantee that a separated family will improve their living standards after an expensive divorce.

 

Aside from the costs, the actual economic impact of divorce on the community is the slowing down of the workforce. It directly impacts employment across all industries, as people who recently got separated are more likely to have more absenteeism and lower morale in how they approach work. Moreover, this effect can extend for years.

 

Circling back to economic stability, US taxpayers shoulder a lot for divorce and unwed childbearing, having an estimated $112 billion per year to fund anti-poverty programs.

 

Issues to Consider in Divorce

During a divorce process, there are issues that both parties encounter along the way, including the final decisions of the court that they have to follow. Aside from that, some things must be privately resolved and considered before finalizing the decision. In addition, divorce can be a stressful and emotionally draining process, so it is important that living arrangements, financial assets, and custody of children will have to be laid out in detail and be fairly discussed.

 

Mediation vs. Litigation

Simply put, mediation attempts to resolve the conflict between two people. It is not a mandatory process required legally by the state as it is a private and confidential thing. The main advantage of this process is that the couple gets to arrange all things considered by themselves without the hassle of taking their cases to court. While this may be an efficient way of settling the divorce, it is not always for everyone.

 

People who want to get divorced sometimes prefer not to try and resolve it privately because one side might not be willing to listen to reason, as most conflicts have. An abusive spouse is one of the most common reasons why mediation just can’t be done in some cases.

 

Litigation, on the other hand, is facilitated by the court. It always requires a legal representative to help advocate one party’s concern about the process. It is also a whole lot longer process than mediation.

 

Getting A Financial Planner

Financial planners are becoming essential for people who want to divorce because of their grave financial implications. As stated before, one can have a significant loss in their income and might even fall under poverty. Therefore, a financial planner will be an essential agent to include in the process. However, it is important to note that a solicitor is different from a financial planner. A solicitor operates around the legal grounds of the division of properties and assets in a divorcing couple. On the other hand, financial planners help the individual settle with the best possible financial situation after the court ruling has been made. This includes having investments and other options that an individual might not be aware of.

 

You might think that a financial planner, in this case, can only be effective after the court ruling has been finalized, it is better to get a financial planner early in the divorce so they will not overlook all the options available during the process. This will help the parties involved evaluate their options so they can decide what’s best for them in both the short and long term.

 

Money You Need To Prepare For A Divorce Settlement

There are things to avoid in a financial decision in a divorce, such as not considering mediation at first to try and resolve the conflict privately and efficiently without the intervention and facilitation of a third party like lawyers and financial planners. However, if it does come into litigation because all the other options have been explored and just didn’t work out well, preparing money for a divorce settlement is a crucial step to take next.

 

Budget For Long Term

Divorce is not a short-term process at all. It is a decision that can impact people’s lives as couples go their separate ways, affecting their children in the process (although it should be clarified firsthand that the children shouldn’t be involved in the separation in the first place).

 

Assets

As stated before, assets and properties can be a complex matter discussed in a  divorce. However, it should still be considered, as this can determine the individual’s financial situation after the ruling is completed.

 

Marital assets are not all created equal because of the general rule that if an asset is officially named after a specific individual, they have all the right to take it with them, and the other party will have no control over them. In this case, power of attorney is an important thing to note, as it acts on behalf of one party to claim the rights of a certain asset.

 

Update Your Life

For most people, divorce can be depressing and emotionally taxing, and they are right to feel that way. However, it also means having the chance to start a new life. This doesn’t only mean emotionally, as there are also literal things that should be updated with your life as you go on, such as estate planning.

 

Financial Decisions During Divorce

Making wrong financial decisions during a divorce is common since people are at the time in their lives when they are more psychologically vulnerable. Financial advisors help address issues the individual is troubled with, but this adds to the duration of the process since they also have to know the exact current economic condition. For people undergoing a divorce, here are some of the things you can do to make sure you don’t overlook any small details in the process. This way, you can have the best possible financial outcome after the divorce’s court ruling is finalized.

 

Marital Home And Other Real Estate

Divorce can be rough emotionally, and that’s exactly why you have to get out of the possible added stress in the future when trying to sustain a separate household. It is almost guaranteed that the divorce cost will hit your financial condition, so it’s always a smart move to get rid of the things that you don’t need.

 

Retirement Plans and Pensions

It doesn’t matter how irrelevant the issue is to your actual concern about the marriage; you still have to document it in case you need it in the future. The most important thing here is to have a clear, written description of your statements. Considering your retirement plans after a divorce is one of the most important things to evaluate since this means you no longer have your spouse in retirement, and the circumstances change.

 

Savings and Investment

Having an advisory team by your side will prepare you for what’s coming next in the divorce process. While it can be costly in itself, ensuring that you can survive the divorce with your insurance, budgeting, savings, and other financial decisions go a long way in the long run.

 

Business Assets

If you have a business explicitly named to you, you can make a case to get full ownership of it, and your spouse will have no control over it. A business is a good investment, and it can help you build your financial growth back up again after suffering a loss in a divorce.

 

Children

Divorce can be emotionally draining to the children since they need both parents for their development as they transition into adults. In addition, children with divorced parents were found to be more susceptible to experiencing poverty, so it is crucial that you include your children in your decisions.

 

Taxes

Most states have a policy that requires you to wait for 90 days, which is not a real option for couples who just want to dissolve their marriage as soon as possible. At this point, one party must hire a tax expert to ensure that everything goes smoothly, such as the dissolution of joint taxes.

 

Debts

Updating your status will also affect how you have to pay for debts in the future, so you must consider and plan how you will pay for it as you separate from your spouse. For example, if the debt is named specifically to you, then your spouse can opt out to continue paying for that debt unless you have a joint credit card.

 

Insurance

Insurance can be considered a part of the financial statement to be named in a divorce. Therefore, it is important that you cash out the policy’s value to be distributed appropriately. If you are the policyholder, you have the power to include it as a financial statement or not.

Frequently asked questions

How do I protect myself financially in a divorce?

Get organized. It is always crucial that you have all your assets separated from your spouse to avoid suffering from many financial consequences after a divorce.

Are assets always 50/50 in a divorce?

Many states view marriage as one party instead of two, so any asset acquired by the couple during their marriage is split 50/50. However, it’s not always an absolute 50/50 since there are states that prioritize equitable distribution.

Are separate bank accounts considered marital property?

Separate bank accounts acquired during the marriage are considered marital properties in other states. However, many states abide by equitable distribution law, which means that the assets, including separate bank accounts, are solely owned by one party.

Big Piggyy

"Show me the MONEY!!!" – Jerry Maguire

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