When considering a dissolution of marriage, the most common question posed is, “How will divorce affect me financially?” A stable marriage is one of the best paths to maintaining and establishing wealth. Divorce is expensive. Possessions, money, financial assets, and debt acquired during the marriage are divided between former spouses. In fact, it’s estimated that individuals need approximately a 30% increase in income to maintain the same standard of living they had prior to divorce.
Arguably, the most devastating cost of divorce is its effect on the family, but divorce can also be financially damaging. Your income may be affected, and it’s possible you could leave the marriage with high debt, and a negative impact on your credit score. Knowing how best to protect yourself can potentially make divorce less expensive, and perhaps less painful. Here are ways your finances may be affected due to divorce:
Obligations: Child Support & Alimony
One of the central financial issues of divorce involves payment of child support and/or alimony. Child support payments are calculated in the state in which the divorce was granted, and state guidelines account for things such as each parents’ income, number of children, and custody agreement reached. If you are ordered to pay child support, you are legally obligated to pay it. Child support can be reviewed and adjusted periodically, but you should consider child support payments when drafting your monthly budget.
Another potential financial obligation as a result of divorce is spousal support. Alimony is separate from child support, and is generally seen as a temporary measure to aid the spouse who may see their income shrink dramatically following the divorce. In most cases, spousal support has a specific end date, as does child support. If you are the spouse receiving these payments, you may need to plan for your budget once these payments cease if the award is for a period of time. If, for instance, you don’t have enough income coming in, you may need to consider pursuing a different line of work, or going back to school to advance your career.
Division of Property in a Divorce
Unless you have a prenuptial agreement, the laws in your state determine how your assets are divided in a divorce. Tennessee is an “equitable distribution” state. This means that once property is classified as marital or separate, the trial court must divide marital property equitably. This does not always mean equal division of property. In other words, marital property may not be divided 50/50. Property acquired during the marriage is marital property. Separate property, also known as non-marital property, consists of all real and personal property owned before the marriage, gifts, and inheritances. Only marital property is divided, and each spouse keeps his or her separate property.
Before contacting a mediator, arbitrator, or attorney, you will want to have an idea of the value of assets you have acquired throughout your marriage. List your marital assets, and get appraisals when necessary (art, antiques, real estate, etc.). All of this will be addressed in the divorce settlement. In addition, you should be aware of any marital debts you have acquired, such as the mortgage on your home, home equity loans or lines of credit, student loans, credit cards or car loans. Similar to assets, liabilities will also have to be divided in a divorce.
Gender Impact on Divorce
Financial challenges following a divorce are common. Generally, women suffer more from financial losses than men because of unequal wages between men and women, and because women usually have more expenses due to the physical custody of children after divorce. Most children, 5 out of 6, live with their mothers after a divorce, so the financial effects of divorce on women and children are largely the same. The financial burden is greatest during the first year after the divorce, and varies for each woman depending on how much money she contributed to the family income before divorce, and the ability and willingness of her former spouse to make support payments.
It is a myth that men are better off financially following a divorce. They too, struggle significantly when compared to the financial security a marriage provides. Similar to women, how much men lose financially depends on the amount of money they contributed to the family income prior to the marriage’s demise. Men who provided less than 80% of the family income tend to suffer more financially from divorce.
Once you and your spouse have decided to end the marriage, and proceed with a divorce, you’ll want to meet with a financial planner that is independent of your marital estate. A financial planner can quickly compile your financial information to provide your legal team with a fair and accurate summary of the marital estate and monthly budget. The financial planner’s purpose is not to leverage outcomes but to provide a current summary of your financial situation. You will learn the value of marital assets, the balance of marital debt, the net worth of your estate, and what the cost is to run the household each month. With this information, you may contemplate next steps, including the timing of a potential divorce filing, possible employment outside the home, and re-education possibilities.
If you decide to proceed with a divorce, you will be starting a new stage of your life. Think about how you will meet your financial obligations and where you will live. Many things will change for the better. Many things will be challenging. We advocate visualizing the sort of life you will lead when you are no longer married. This process helps you mentally prepare for the future, and the challenges and joys you will face.
We have 3 Tennessee Supreme Court Listed Rule 31 Family Law Mediators (McKenna Cox, Jason Holly, and Johnathan Minga). Call today at 423-434-4700 to get started.