Divorce is one of the most stressful life changes people experience. It can be emotionally devastating and lead to feelings of grief, depression, anger, resentment, fear, anxiety and shame. Beyond the emotional toll, which may be high even if the marriage is dissolving amicably, divorce can also wreak havoc on your financial life.
Financially planning a divorce
Certified divorce financial analysts receive specialized training in providing financial help for divorce. They think about the process in three phases: anticipation, ending and passage.
Here’s how to navigate each phase of divorce financially, according to financial experts.
Phase 1: Try to anticipate divorce and prepare your budget
Even if a partner’s decision to end a marriage takes the other by surprise, there’s always a period when spouses are anticipating divorce before it’s underway. During this time, get a sense of the marital balance sheet and each partner’s expenses.
This can be challenging, particularly when child support is in the picture, says Amy Irvine, a certified financial planner and certified divorce financial analyst with New York–based Rooted Planning Group. “Especially if you’ve had your expenses merged for a period of time, breaking that out can seem like a simplistic task, but it’s often very complex. It takes time, energy and thought,” she says. So the process can be comprehensive, she recommends looking at bank and credit card statements for a period of six to 12 months and deciding if the expense is one partner’s or the other’s or a joint expense.
Then, analyze how those expenses will change or be divided once the household is separated. An expense like weekly grocery bills might morph into two households’ weekly grocery bills. Other expenses might end, like a shared club membership. Others might continue, like a child’s school tuition payment, but may need to be divided. “Often, that visualization side is a bit challenging for people,” Irving says. “It’s really challenging for people to see the other side of the journey.” Irving recommends mapping out what you want your life to look like on the other side of divorce, then working backward to see how to make the finances work. Often both spouses experience a drop in standard of living after the divorce process as they reestablish their lives and finances. It requires determination and ingenuity to recover.
Phase 2: End the marriage by dividing the assets and debts
Dividing marital financial assets can be one of the most important—and most uncomfortable—phases of the process. Many states have community property laws that make spouses equal owners of assets. Courts and lawyers are attuned to splitting assets equally, but perhaps not equitably.
Because everyone’s financial situation is different, it may not make sense to split every asset down the middle. Perhaps it would be more beneficial for one spouse to keep the home and home equity to have lower house payments and forgo some retirement funds. Or perhaps keeping one of two cars isn’t important for a spouse who has easy access to public transit. Irving says while determining how a shared home will be handled may be emotionally difficult, it’s also transactionally quite easy.
It may be more difficult to determine how to handle debts. If a debt is accrued during marriage, it’s considered to be owned equally between the partners, particularly among creditors. It’s important to determine how that debt will be paid off (by the partner who took out the credit or both parties) and ensure partners disentangle their credit by removing each other from loans or as joint account holders on credit cards.
Every divorce decree should be as specific as possible in outlining how assets and debts will be handled. “If it’s not very specifically laid out and agreed upon in advance, that’s where we see conflict post-divorce,” Irving says. Additionally, if assets such as pensions or qualified retirement plans, such as a 401(k), are being divided, you may need a qualified domestic relations order or QDRO. These additional judgments go beyond divorce decrees to order the division of retirement plans and/or cover topics such as child support and alimony payments.
Certified divorce financial analysts can help guide the parties through what’s most beneficial for them and discuss the tax impacts for those decisions. Even if you can’t work with a financial planner, it’s valuable to keep an open mind as you seek financial help for divorce to find what’s equitable and beneficial for you—not necessarily equal.
Phase 3: Look toward the future and financial recovery
Nancy Hetrick, a certified divorce financial analyst and founder of Smarter Divorce Solutions, says one of the biggest tasks in reestablishing your financial independence after divorce—and one of the most difficult surprises for those who experience it—is reestablishing credit. Hetrick speaks from personal experience. “Even though I had a credit score that was over 700, the day my divorce became final, the length of my credit history disappeared. Because on all my credit cards I was the additional signer,” she says. It took her eight years to get her credit history back. She guides clients through various strategies to recover their credit, from keeping their utilization rates low to ensuring they have multiple forms of credit (such as a credit card and a car loan) on their reports.
The financial experts agree, it’s important to quickly establish a budget as an individual. Because partners often experience a drop in household income, facing the financial realities after the divorce process can be harsh. They recommend envisioning a one- to two-year recovery period to stabilize expenses when you form your financial plan.
Divorce can disproportionately impact women
A 2018 study in the journal Demography found that while men feel the short-term consequences of divorce via several measures of well-being, in the long run, women experience the financial effects of divorce more acutely. Women may accrue more debt, face gaps in health insurance and encounter greater losses in household income, which can lead to a greater risk of poverty. Studies show this is particularly true among women experiencing “gray divorce” (divorce after 50), who experience a “45% decline in their standard of living.”
Because of the gender wage gap, women often earn less than their male partners. They also frequently derail or pause their careers to become the primary caregivers for children and aging parents, which may mean they bring in no income or less income and have fewer or no credit cards, investments and retirement accounts in their name. Thus, they often have fewer resources to shoulder the effects of divorce than male spouses do.
There’s also been a fundamental shift in how courts see spousal support, Hetrick says. “The divorce laws across the United States are starting to change. Alimony is going the way of the dinosaur. Back in the ’70s and ’80s, divorce was deemed the breach of a lifetime contract. It was very common for women to get very long-term spousal maintenance awards, and that just doesn’t happen anymore,” she observes. Instead, any support is seen as rehabilitative and, if awarded, is often paid temporarily.
Women are often in a position where they’re required to reinvent themselves. “The sooner a woman can start planning for her next phase of life, and how she can be the most successful—even if that means returning to school for a period of time—that’s going to make a huge difference,” Hetrick says.
Hetrick helps clients look at the silver lining. Divorce may seem devastating, but it’s also an opportunity for transformation. “So many women became mothers and wives, and we lose track of who we are as… authentic individuals,” she says. “But they have an opportunity to think back to when they were girls or in high school. What did you want to be when you grew up? And what if we bring some of those dreams back to life again? It’s never too late.”
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