Cost of Divorce: Five Financial Realities

Divorce can be an emotionally and financially traumatic event. Here are five common financial issues during divorce, and ways you can take control of your finances during this challenging time.

You may not be able to avoid the emotional upheaval that comes with divorce, but you can be realistic and practical in how you plan for your future.

Divorce can be a traumatic event, emotionally and financially. Below are five common financial issues during divorce, and ways to can take control of your finances during this challenging time.

1. Personal Expenses Related to Divorce

Be prepared for unexpected expenses in a divorce.

For example, you may want to keep your marital home to maintain stability, continuity, or positive memories. But keeping the home could mean you alone will be responsible for mortgage payments, repairs, assessments, taxes, insurance, and other expenses. Prepare to cover ongoing costs like utilities, cable TV, and broadband internet. Depending on the division of property, you may also have to replace furniture and other household items like kitchen appliances. If you move, you may have to take on all of these expenses for another home.    

Divorced parenting also may involve costs such as daycare, college saving accounts, and travel expenses between two homes.

Your health insurance needs may change too. If you will be losing your health insurance benefits as a result of divorce, consider COBRA Continuation Coverage, which may be available for up to 36 months after divorce as long as you provide the proper notice to the plan administrator and elect the coverage. Losing employment-related coverage is considered a special event in the Health Insurance Marketplace, allowing you to purchase insurance through even if it is not an open enrollment period.

2. Tax Issues Related to Divorce

You’ll likely need professional help to sort out any tax implications of dividing assets and income. For instance, if you and your spouse liquidate stocks or other property, you may have to pay taxes on capital gains.

Construct a clear picture of the parts of your income that will be taxable after a divorce. Child support isn’t considered income and is not taxable, but alimony is considered taxable income. If you’re paying child support, it is not tax deductible, but alimony payments are deductible. 

Note that the custodial parent may be the only one who can claim the tax exemption and child credit for dependents.

3. Legal Expenses Related to Divorce

Lawyers' fees mount up quickly, which may be one reason why most divorces are settled out of court. Make sure you hire qualified attorneys, and never squander expensive professional time discussing nonlegal personal matters with your legal team.

4. Apportioning Assets During Divorce

When apportioning assets, start by inventorying all current marital property you can identify, including cash, checking and savings accounts, retirement and brokerage accounts, annuities, real estate, and Social Security and employer-funded benefits.

You may need to revise your will or designate different beneficiaries for insurance or retirement policies like individual retirement accounts (IRAs). 

A  qualified domestic relations order (QDRO) is a court order that creates or recognizes the existence of a qualified individual’s right to receive a portion of a retirement plan. Each plan — whether a 401(k), 403(b) or other pension — probably requires its own QDRO.   

To know all your options regarding assets, discuss these issues with a qualified attorney.

5. Settling Joint Debts during Divorce

Just as marriage partners often share assets, they also often share debts and liabilities. Make sure you know the outstanding balance of every debt that you owe jointly with your spouse, and have copies of both the loan agreement and recent statements for each debt.

Recognize that a court order requiring one spouse to pay the full balance owed on a joint debt does not necessarily prevent the creditor from taking action against either or both spouses if that debt is not paid as provided in the loan agreement.

You will want to monitor and nurture your credit standing, so request a credit report from each credit bureau. Also check your accounts for any unusual outgoing payments to make sure you’re not unwittingly footing the bill for a shared expense. Above all, continue to pay all your bills on time and maintain good credit, which will support you in the next chapter of your life.

Read our Divorce Checklist as a guide to help prepare for the financial realities of a divorce.


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