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The Financial Impact of Divorce

The Financial Impact of Divorce
The highest cost of divorce is the toll on the people involved, particularly children. However, the financial costs related to divorce can also be substantial. If you are contemplating divorce, be sure you first understand all the potential expenses involved.

The Cost of Divorce
Divorce cost estimates vary widely, from an average of $15,000 for a contested divorce to $1,500 for a non-contested divorce. Complex, litigious divorces can run up to $50,000; “do-it-yourself” divorces may be considerably more affordable. Hiring an attorney is generally the best way to protect your interests; however, this will likely be more expensive as well. Mediation or arbitration is generally less expensive than using an attorney.

Dividing Assets
State law determines how assets are divided in a divorce. In “community property states,” assets acquired in the marriage will generally be divided equally. Other states observe “equitable division”— this is not necessarily the same as equal distribution. Numerous considerations will be weighed when determining how exactly assets should be divided.

Dividing Debt
Married couples don’t just share assets; they often share debt. Determining who is responsible for what debt is often a contentious issue. Requesting a joint credit report from each of the three credit reporting agencies can help you determine which debt is shared and which debt is in your spouse’s name only. During a messy divorce, people sometimes rack up debt to spite their partner. Keep a close eye on your credit cards, bank accounts and credit report for any suspicious charges.

Child Support
Child support payments are determined by income and therefore vary considerably. One estimate puts the average annual child support payment due around $5,000. However, much of this child support is never paid—the actual amount received by a custodial-parent averages closer to $3,200 annually.

Alimony/Spousal Support
Alimony (or spousal support) terms and payments—if any—vary widely from state to state. In the case of ‘no fault’ divorces, alimony is conditional, not required. Martial fault is a factor in awarding alimony in dozens of states. Although alimony is more commonly awarded to women, alimony may be requested by either party.

‘Start Up’ Fees
In addition to the cost of the divorce itself and any child or spousal support, divorcing parties usually face a number of other expenses related to starting over. These costs may include down payments or deposits for a new residence, moving costs, new utility deposits, child care fees, and replacing assets lost to the other spouse in the divorce.

Tax Implications
The IRS generally does not consider the transfer of assets between spouses in a divorce as a taxable event. However, there are still numerous tax considerations to think through, including capital gains. Failure to properly plan for these tax implications can be damaging. For example, the spouse who winds up with a particular asset may be forced to sell that asset simply to pay the required taxes. The most expensive assets a couple typically owns are: the marital residence; mutual funds, stocks and bonds; and retirement accounts.

Divorce Alternatives
Movies often romanticize divorce as liberating and empowering. In reality, the period surrounding a divorce is usually messy, painful and expensive. If you are interested in saving your marriage, but feel hopeless, take heart: A major study by Linda Waite at the University of Chicago found that in so called unhappy marriages, almost 8 out of 10 who avoided divorce were happily married five years later. The researchers also found that two-thirds of unhappily married spouses who stayed married reported that their marriages were happier. Many couples are able to resolve their differences through marriage and relationship education and/or marital counseling. Even if only one partner is willing to attend, the overall quality of the marriage can still be improved.

Preventing Poverty
Apart from the initial divorce-related fees, divorce can also have negative long-term financial consequences. Marriage is one of the best defenses against poverty. The poverty rate for children in married-couple families is around 8 percent. In single-parent households, the child poverty rate is around 35 percent. That is not to say you should stay in a truly unhealthy relationship for purely economic reasons. But before you write your marriage off as a total loss, be sure you have accurately calculated the costs—both financial and emotional—of divorce.

Note: Financial and legal advice should be tailored to the specific circumstances of each case. Laws are constantly changing. Nothing provided herein should be used as a substitute for the advice of competent counsel.


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