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Financial Pros and Cons of Divorce

Annie Presley

Director of Financial Education

Last Updated
March 10, 2022

How Will Divorce Impact Your Financial Life?

The financial implications of divorce can be drastic and far-reaching. However, surprising to many people is that not all financial consequences are negative. In this article, we highlight some financial pros and cons of divorce.

Pro: Greater control over your finances

If money issues are a stressor to your marriage, it may be a relief to divide up all assets and take control of your financial future. It can also be easier to stick to a budget and remain on track toward your financial goals when you’re not worried about your spouse derailing your plans.

Pro: Additional college financial aid for children

A divorce can actually be beneficial when it comes time to pay for college. The Free Application for Federal Student Aid (FAFSA) only requires financial information from the custodial parent. So, if the custodial parent makes less than the non-custodial parent, the student may be eligible for more financial assistance. Keep in mind, however, that any child support and alimony received from the non-custodial parent must be included as income on the FAFSA.

Pro: An opportunity to reprioritize your financial goals

A divorce can be a great opportunity to take stock of your life and determine what’s really important to you. Following a divorce, it’s not uncommon to discover that you tagged along with your spouse’s dreams for the future and that you actually have different goals for the next chapter of your life.

Pro: Access to Social Security spousal benefits

You may be entitled to Social Security spousal benefits if you were married for at least 10 years and have reached age 62. And, unlike married spouses, you don’t need to wait for your husband or wife to claim benefits in order to receive your spousal payments. In addition, claiming spousal benefits won’t impact the amount your ex receives.

Con: The challenge of sorting out credit card debt

Handling credit card debt in a divorce can be a sticky situation. States typically handle debt from a divorce in one of two ways:

• “Common law” states hold the spouse who incurred the debt responsible for its repayment. This means you will only be responsible for debt issued to you individually, jointly to you and your spouse, or to your spouse with you as a cosigner.

• “Community property” states will hold both spouses responsible for any credit card debt incurred during the marriage, even if the debt is only in one spouse’s name.

It’s important to note, however, that credit card companies will hold you accountable to your original credit agreement, regardless of a judge’s orders. That means if a judge assigns the debt to your spouse and he/she refuses to pay, the credit card company may still come after you as a joint owner or co-signer on the account. Also, if you and your spouse share a joint credit card, you can’t simply have your name taken off the account. Instead, you’ll need to completely pay off the balance in order to close the account. If you are unable to pay off the balance and close the account, you can instead consider freezing the card to at least stop future charges.

Con: Tax consequences

It’s important to take any potential tax consequences into account when deciding how assets will be divided following a divorce. For example, if you are eligible to receive a portion of your spouse’s 401(k), you will have the option to roll it over into an account in your name, leave the balance in your spouse’s existing plan or receive the balance as a cash payment. While the IRS permits a one-time, penalty-free withdrawal following a divorce, any amount you receive directly will be taxed as ordinary income. Additional withdrawals will be subject to a 10% early withdrawal penalty if taken before you reach age 59 ½. Divorce will likely impact your filing status as well. If you do not have primary custody of your children, you will not be able to claim them as dependents. This means your taxes may increase as a single filer.

Con: The cost of the divorce itself

There’s no way around it – divorce is expensive. The average cost of a divorce in 2020 was $12,900.1 However, a contested divorce that involves alimony, custody and other spousal support issues can cost significantly more in legal, filing and attorney fees. Even amicable splits that are handled by a mediator can cost between $3,000 and $7,000.2

Con: Challenges in obtaining health insurance

If your spouse carried your health insurance while you were married, you will likely need to obtain your own coverage after the divorce. If you are unemployed or ineligible for benefits through your employer, it may be difficult to find affordable coverage. If you do not have access to your own employer-sponsored plan, consider purchasing coverage under the Affordable Care Act. Once your divorce is finalized, you will be eligible to enroll during the Special Enrollment Period, which allows 60 days to choose and enroll in an insurance plan that meets your needs. Another option is COBRA; however, this tends to be expensive, as you must pay the full premium (both the employee and employer portion) as well as an additional fee. The good news is if your children are covered under your spouse’s plan, their insurance will likely not be impacted by the divorce. If you’re struggling with the financial challenges of divorce, you are not alone. At Creative Planning, we have a specialty team focused on helping individuals identify a clear path forward before, during and after divorce. We can help you to determine your financial needs, gain an understanding of your options, and make decisions that are in the best interests of you and your family. We can also help you step into your future with knowledge, courage and confidence. For help navigating the financial pros and cons of divorce, or with any other financial matter, schedule a call with a member of our team.

Footnotes

  1. https://www.fool.com/the-ascent/research/average-cost-of-divorce/
  2. https://www.survivedivorce.com/kansas#divorce-cost
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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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