If you or someone you know is considering a divorce, you may be wondering how it can impact a person’s financial life. According to a recent survey, the average cost of a divorce in the United States is around $15,000 per person. A contentious divorce, however — one that includes a custody dispute — can cost more than $100,000.
Divorce can be both emotionally and financially taxing, so going into the process informed and prepared can help prevent any surprises that can make the situation even more difficult than it already is. Because while many of us may have some idea of the financial impact of divorce, there are ways it can impact us that we’re not even expecting.
Here are seven surprising ways divorce can affect your finances.
Your health insurance
Depending on whose plan you were under when you were married, you might have to pay for health insurance once you get divorced. If you’re unemployed or don’t receive health insurance through your employer and were relying on your spouse’s insurance while married, you’ll be financially responsible for obtaining your own coverage once you’re no longer covered by your former spouse.
According to Your Divorce Questions, a free online resource for individuals affected by divorce, nearly 25% of women lose their health insurance for at least some period of time after divorce. Of course, this can happen to either spouse, but the point is to be prepared in case you’re the one losing coverage.
If you’re facing losing your health insurance, you have options, though it may be more expensive than what you were used to when you were covered under your spouse’s insurance. The Affordable Care Act Health Insurance Marketplace is a good place to start as you look for private health insurance so you can remain covered.
The real-life costs of child care
If you and your spouse have children, it may be expected that you’ll pay child support or that child support may not cover all your expenses. But have you thought about this in real-world terms and prepared for it? The average annual cost of infant care in the US varies by location, from a low of $5,436 in Mississippi to a high of $24,243 in the District of Columbia, according to numbers provided by the Economic Policy Institute. The annual childcare costs for a 4-year-old are only slightly lower, from $4,784 to $19,112, so not preparing for the major cost of childcare can be a serious mistake.
A strain in your finances can mean fewer opportunities for your children, including missing out on activities like summer camps, sports, or music lessons. It can also impact how much money you have to put food on the table each day. If you have less income from paying child support or from not receiving enough to cover these expenses, you may have a harder time providing for all the needs and desires of your children.
Because you can’t necessarily change the amount you’re ordered to pay or receive, you might have to consider other ways to pay for these expenses. If you’re having trouble paying for food, you may qualify for the federal program, Supplemental Nutrition Assistance Program (SNAP), which provides nutrition benefits to low-income individuals and families. For activities like sports and summer camps, you may need to do some budgeting so you can save up or free up money.
Refinancing and your credit score
In the divorce process, the court will likely divide your assets and debt between you and your spouse. The court will also likely indicate which party is responsible for paying which bills. But you may also be wondering how to remove yourself or your spouse from certain debts, such as a mortgage or personal loan. Unfortunately, this process isn’t always easy.
For a mortgage, the first thing you can try is to simply ask your lender for a release of liability, but there is no guarantee your lender will issue one. If that doesn’t work, you may have to refinance your mortgage in order to remove one of you from the debt. The person remaining on the mortgage will have to qualify for the new loan using just their income and assets. If they don’t qualify, the lender may not be willing to issue the new loan.
Refinancing debt in order to split up the bills can result in hard inquiries on your credit profile, a decrease in the average age of your debts, or even an increase in your overall debt. This can result in a lower credit score, and that lower credit score can stick with you for a while and impact your financial freedom in a lot of ways.
Divorce’s impact on your credit score may not be avoidable, so it’s important that you always pay your debts on time since this has an overall greater impact on your credit health.
Your credit cards
Credit card debt can be complicated to sort out but it may also be divided by the court during the divorce process. Regardless of who sorts it out, you’ll need to answer some basic but often surprisingly difficult questions. Do you know which cards are in which name? Who is an authorized user on each card?
If you or your spouse is only an authorized user on a credit card — meaning you were given permission to use the account, but you are not the primary account holder who applied for the credit card — having yourself or your spouse removed isn’t too complicated and can generally be completed by making a phone call to the credit card issuer.
If, on the other hand, you and your spouse are joint account holders and applied for the card together, the process for removing one of you from the account becomes more complicated. Since you’re both responsible for the debt on the account, the credit card provider must agree to change the contract and remove one of you as a responsible party.
For the credit card issuer to agree to this, they may require that the person remaining on the account be able to qualify without the other person’s income and credit history. If the individual can’t qualify, the credit card issuer might deny your request to be removed. If this happens, your only other option might be to pay off the credit card and request that the account be closed.
Credit card debt can directly impact your credit score if one of the two of you doesn’t keep up payments and you don’t divide up the debt cleanly. The best thing you can to ensure your credit remains intact is to make sure your debts are paid on time. If your spouse must remain on the account until the balance is repaid, it’s important you’re both on the same page. You don’t want your or your spouse’s credit negatively affected because either of you didn’t make your payments on time.
Your retirement plans
You might think that because your 401(k) was earned through your job that it’s all yours. But did you know retirement plans are considered “marital property”? This means you and your spouse are both entitled to a portion of the assets in a divorce settlement.
Through a Qualified Domestic Relations Order (QDRO) — a judicial order that splits a retirement plan or pension plan — your 401(k) can be ordered to pay child support, alimony, or marital property rights to your spouse. Depending on who the major wage earner was, this can have a significant impact on your retirement plan and even your current financial situation.
If you are the owner of the retirement account, having the assets divided can mean you have to now contribute more to get the account back to the value it once had. This can put an even greater strain on your finances, especially if you’re paying alimony and child support as well. If you are older and getting divorced closer to retirement, this can have even more of an impact.
The tax consequences
Divorce can result in certain tax consequences that should be taken into consideration ahead of time so you can plan accordingly. Splitting your assets, like claiming your portion of your spouse’s retirement plan, can turn sour if you don’t consider the tax consequences of your decisions.
When qualified plans like a 401(k) are divided, for instance, there are three options available to the spouse claiming their portion of the assets. Let’s say you’re the spouse receiving half of the assets. Your portion of the assets can be rolled over into your retirement plan, your share can be left intact with your spouse’s existing plan (for you to take payment later on in retirement), or you can elect to take the money now as a cash payment.
The chance to take your portion in cash without penalty is a one-time opportunity given at the time the plan administrator approves it. After that, withdrawals are subject to a 10% early withdrawal penalty if taken before the age of 59 1/2. Regardless of age, the IRS will treat the distribution as regular income, so you or your spouse would be liable for income tax on that amount.
Divorcing will also affect your filing status. If you don’t have custody of your children, you may not get to claim your kids as dependents, and you may pay higher taxes once you start filing single.
Attorney fees and court costs
Not all divorces end in bitterness. Although it may be easier said than done, working together can help a lot of things, including keeping your attorney fees down. If you and your spouse are capable of trusting and cooperating with each other, you might be better off with something known as a “kitchen table divorce.”
A kitchen table divorce simply means you and your spouse sit down together to work out your own divorce settlement. You may still want legal assistance to ensure your divorce papers are filled out correctly, but you can avoid having to pay someone to serve the petition to your spouse by having them sign a receipt for it, known as an Acceptance of Service.
Another way to reduce costly divorce litigation is to consider mediation instead of going to court. Similar to a kitchen table divorce, you and your spouse amicably discuss your options, but with a professional mediator present to help the discussion along the way.
If you and your spouse are able to work together throughout the divorce process, you may be able to avoid many of the high costs associated with it.
Divorce is never pleasant, and it’s hard to be prepared for all the ways it can impact you. Aside from the emotional strain, divorce can have a significant impact on your financial life as well.
Understanding the surprising effects divorce has may not change the situation, but it can help make the process smoother. Familiarize yourself with how divorce can impact your finances and take the time to learn how to manage your money to pay off any debts you might incur in a timely manner.