Nearly half of all marriages end in divorce. Yet all too often couples hurriedly go their separate ways without crunching the numbers to see how a breakup will affect them five, 10 or even 20 years down the road.
A newly inked divorce decree may help ease the emotional strain of a failed marriage. But a settlement that doesn’t make good financial sense could mean you’ll have to make some undesirable lifestyle adjustments down the road.
Consider these 10 ways to lessen the financial impact when it’s time to call it quits.
Avoid divorce devastation
- Settle out of court.
- Keep emotions out of it.
- Bone up on financial matters.
- Deal with debt strategically.
- Check financial statements.
- Alimony vs. child support.
- Revise lifestyle budget.
- Don’t forget retirement.
- Hire a good financial team.
- Protect property interests.
1. Agree to settle most issues out of court
In hotly contested divorces where anger and other emotions run rampant, legal fees can quickly eat into assets that could have been used for other things.
A divorce can cost from a thousand dollars (for an uncontested divorce) to hundreds of thousands or more, according to divorce360.com, an online resource for divorce information.
Spousal support, child support and division of property are the top three issues in the majority of divorce settlements, but couples who are able to communicate can arrive at an agreement without an attorney, says Ed Sherman, author of “Make any Divorce Better!”
It’s usually best to settle as many issues out of court as possible, he says. Oftentimes, this can be done with the help of a mediator or arbitrator.
Find one with a background as a judge or an experienced family law attorney who understands the laws in your state, Sherman advises.
You still generally need a court to approve any settlement, but at least you’ll spend less time and money on legal fees.
Sherman cautions that mediation and arbitration do have some shortcomings, namely when you need emergency monetary support or visitation rights.
In those cases, you may need to seek immediate court assistance.
2. Avoid letting emotions cloud your decisions
For many couples, divorce is an extremely emotional time that can lead to bad financial decisions, especially when it comes to divvying up property.
“The financial decisions we make in divorce that are emotionally based are absolutely the worst decisions that we’ll ever make,” says Violet P. Woodhouse, author of “Divorce & Money: How to Make the Best Financial Decisions During Divorce.”
Woodhouse, an attorney and Certified Financial Planner based in Newport Beach, Calif., says people make bad decisions during a financial crisis because they tend to hang onto things that are familiar, such as a home.
“Two years from now those emotions are not going to be there,” she says.
Allow yourself a cooling off period before making financial decisions.
3. Learn how to manage household finances
In many marriages, one partner takes charge of the family finances because it’s convenient, but that can mean the other partner is left in the dark about the overall financial picture.
“They need to gather documentation and be fully aware of their financial affairs,” says Amy C. Boohaker, an attorney and Certified Financial Planner based in Sarasota, Fla.
“That means in-depth knowledge of not just what your assets are but what your liabilities are.”
Bone up on financial literacy concepts. Bankrate’s extensive archive of useful articles is free and easy to understand.
4. Deal with debt strategically
One of the biggest sticking points in a divorce settlement is dividing marital debt.
Your ultimate goal is to be divorced from your spouse, including his or her debts.
If you and your soon-to-be ex-spouse have joint credit cards or other revolving debt, start paying down your account balances as soon as possible because you’re both equally liable for that debt in the eyes of the creditor.
“A divorce decree might say he gets all the joint credit card debt, but that’s not going to get her name off of the account and that’s not going to relieve her of responsibility if he defaults on them,” says Fadi Baradihi, CEO of the Institute for Divorce Financial Analysts.
“What most people don’t understand is the fact that a loan agreement or credit card agreement will not be trumped by a divorce decree.”
Your spouse may be tempted to go on a spending spree with a jointly held credit card before your divorce is finalized, so you may have to close some of the accounts altogether. Your credit score may temporarily take a hit, but it’s a better strategy than starting your new life with mountains of newly acquired debt.
If you decide to keep jointly held accounts open while divorce proceedings are ongoing, make sure the bills get paid on time. Baradihi suggests both parties split all bills down the middle.
It may also be a good idea to order a copy of all three credit reports and start opening individual lines of credit if you can.
5. Check financial statements for errors
When divorcing couples own a business together or have a lot of assets to divide, it’s critical that financial statements are accurate.
Check for red flags like underreported income, questionable business write-offs and large, recent purchases made in the name of the business.
This is one area where things can get complicated, so you may have to consult with a good forensic accountant or a Certified Divorce Financial Analyst, and that won’t come cheap.
The average cost for a Certified Divorce Financial Analyst, for example, is $150 to $250 per hour, according to Baradihi, a Certified Financial Planner and Certified Divorce Financial Analyst.
6. Alimony and child support
Family support is typically paid in the form of alimony, child support or both. It all depends on the financial situation of each party and the terms of the divorce settlement.
It’s important to know the rules governing family support because the Internal Revenue Service treats each type differently for tax purposes.
The alimony recipient generally pays taxes on that income and it’s typically deductible by the paying spouse.
Depending on his or her tax bracket, the payer could get a tax advantage if child support is bundled into the alimony payment.
“If one spouse is in the 35 percent tax bracket and the other is 15 percent, it makes sense that it (family support) be done in some type of alimony scenario because the payee gains the 20 percent tax difference,” Baradihi says.
Child support, however, is never deductible by the payer, and the payment received is not taxable, according to the IRS.
A few more things to keep in mind about alimony and child support: Alimony typically ends when you remarry or die.
Child support usually ends at the age of emancipation, which is typically between 18 and 23, depending on the state you live in and other circumstances.
7. Budget for a lifestyle you can afford
Be prepared to live a lifestyle that’s within your means.
You may have enjoyed certain perks while married, but if you were the spouse who didn’t bring income into the home, you may be forced to cut back or get a job. Likewise the breadwinning spouse who makes family support payments will likely have to rein in spending.
The custodial spouse often chooses to remain in the house to avoid disrupting the lives of school-age children, but it may not make sense to assume mortgage payments on a house if it’s unaffordable, especially if it’s worth less than the amount you owe.
“If you can’t afford it, you can’t afford it,” Woodhouse says.
Further, let’s assume that both spouses are on the mortgage note: What happens if you can’t refinance?
If you receive alimony or other payments, it doesn’t necessarily mean you’ll be able to afford a mortgage payment on a single income. And with credit standards tightening, your credit score or income may not be high enough to qualify for a loan.
Figure out what you can afford by planning a budget that takes into account all your income including alimony, child support and employment income before deciding if you want to keep the house.
Your monthly housing payment in general should be no more than 28 percent of your gross income.
Bankrate’s mortgage calculator can help you determine whether it’s a good idea to keep the house or move.
8. Don’t forget about retirement plans
Before deciding whether to claim a percentage or lump sum of your soon-to-be former spouse’s retirement plan, it’s usually a good idea to get a qualified domestic relations order, or QDRO.
A QDRO is a court order that creates or recognizes your right to receive all or a portion of the benefits payable under your ex-spouse’s retirement plan.
Generally, retirement plans covered under the Employee Retirement Income Security Act, or ERISA, require a QDRO before benefits can be paid to an alternate payee such as an ex-spouse or dependent.
Individual retirement plans that do not fall under the ERISA umbrella can generally be divvyed up without a QDRO; however, some other plans cannot.
“State (public) plans typically have their own requirements, but they are usually not (regulated by) ERISA and city and county plans are generally not qualified plans,” Boohaker says. “They have separate requirements and sometimes they are not even divisible. So it varies.”
9. Hire a good financial team
You may think hiring a good financial team will be costly, but in the long run, not hiring one may end up costing you more once your divorce is finalized.
It may be difficult and costly to modify certain divorce agreements later on. Also, financial concepts are often tedious and difficult to understand. If you’re perplexed, seek help.
“Obtain good expert advice early on,” Boohaker says.
She says a lot of free financial information is available on the Internet, but some of it is not accurate.
A good financial team would consist of a financial planner and attorney. At the very least, they can review your settlement for problems and help you understand your legal rights.
10. Protect your property interests
Before getting a divorce, make sure that your name is on all deeds and titles of property, whether they are jointly or individually owned.
Just because you and your soon-to-be ex shared a beach house or mountain cabin doesn’t necessarily mean that property will be considered divisible during a divorce.
In community property states such as California, where a 50/50 division of community property is mandated by law, property you inherited or received as a gift is generally off limits to your spouse.
Some high-net worth individuals protect assets accumulated prior to marriage with a prenuptial agreement.
This is to ensure that those assets cannot be touched during a divorce. However, a “prenup” can backfire.
Some courts view them with suspicion and will likely scrutinize them for fairness and compliance with state law.
“The fact that you’re asking for a prenup before marriage could be seen as coercing one side to sign it,” Baradihi says.
“Most of them end up (in court) if they are debated or argued after the fact under that premise.”