6 Common Ways a Divorce Can Change Your Personal Finances

Divorce can disrupt nearly everything in life, but many couples underestimate just how much it will reshape their finances. Generally, a person facing divorce has two approaches financially – reactive or proactive. In the reactive mode, an individual responds to immediate financial concerns and tries to maintain the status quo. In the proactive mode, an individual works toward the post-divorce future, considering all options with the long-term in mind and the reality that the status quo will change. 

There are three aspects of divorce that every spouse needs to deal with: (a) emotional; (b) legal; and (c) financial. For many, the financial piece seems to be the one that’s neglected the most. That’s why the first financial step of any divorce is creating a Statement of Property and a Statement of Income and Expenses because your divorce could affect each of the following:

1. Your Monthly Budget 

If you are a two-income household, then half of your net monthly income stream will disappear since a two-income household will become a one-income household. Suppose you are a one-income household and you were dependent on your spouse’s income. In that case, you could be stepping into a zero-income household, unless you have certain circumstances that may entitle you to receive spousal maintenance. If you’re of working age, the Court may expect you to reenter the workforce after a divorce – even if you’ve been a stay-at-home spouse. While you’re much less likely to pay or to receive spousal support than you were twenty-five years ago, child support is still an expected cost of divorce. To put it simply, regardless of your financial position during a marriage, you’ll likely have less money coming into your household after a divorce, and you may not be able to afford all the things you used to when you were married.

2. Your Credit Score

Your marital status doesn’t per se directly affect your credit score. However, a divorce can affect many of your financial habits and result in a lower credit score. A common example is your spouse forgetting to make payments on joint debt – like on a shared or joint credit card, auto loan, or mortgage while the divorce is pending. Even after a judgment is entered, your former spouse might be held responsible for making certain payments. But if your name is still attached to those accounts, your credit score will drop if your spouse misses a payment.

It’s also common to be an authorized user on a spouse’s credit card. If your spouse removes you as an authorized user, your “credit utilization ratio” – which is the percentage of the total credit available to you that you’re using – will rise as your overall credit limit decreases. It’s always prudent to monitor your credit score regardless of your relationship status, but it’s especially important during and soon after a divorce. You should consider using a free service like annualcreditreport.com to monitor your credit score automatically and to view your credit report, which will show you what loans and credit cards are under your name. To limit your divorce’s impact on your credit score, you may want to consider freezing your credit. This way, new credit can’t be approved under your name while you go through your divorce, preventing a spiteful ex-spouse from taking out “revenge debt” in your name.

You should also close joint accounts, though be aware this will affect your credit utilization ratio and subsequently your credit score. Hetrick recommends having a credit card in your name long before a potential divorce. Not only will this help you establish a source of credit solely in your name, but it also guards against the possibility that your spouse could cut you off financially at the onset of the divorce. 

3. Your Taxes 

Going from filing jointly with your spouse to single, with or without dependents can significantly change your tax payment. When you’re married, you get a great deduction. When you are a single filer, you may have no choice but to receive the standard deduction. If you haven’t already consulted with a tax professional, you should hire one during the divorce so you can understand the implications of your new filing status.

4. Your Housing

When going through a divorce, it’s common that either you and/or your spouse will have to secure new housing post-divorce, and living alone can be very expensive. You’ll also now be shopping for a house with just one salary instead of two. If you’re on a tight budget after a divorce, find a mortgage lender with a low minimum down payment and a variety of loan options. House shuffling can have major tax implications as well. Colton points out that you can sell your primary residence exempt from capital gains tax on the first $500,000 of equity if you are married and filing jointly. However, if you get divorced and subsequently file as single, only the first $250,000 is exempt from capital gains tax. For example, consider a home that has $500,000 in equity, and you or your ex-spouse decide to sell it after a divorce. “That probably means a $40,000 tax bill,” Colton says. So, you might be better off selling your house before your divorce is finalized to take advantage of a hefty tax exemption.

5. Your Insurance Coverage

You’ll likely have to update many of your insurance plans after a divorce, especially if you primarily received coverage from a spouse’s plan. The day after your divorce is entered, you are no longer eligible to use your spouse’s health insurance. So, you will need to get your own policy, which may be expensive. You will also have to secure your own auto insurance if you and your spouse were on the same policy. You may also want to consider purchasing a life insurance policy, especially if you have young children, to ensure financial stability in case something happens to you.

6. Your Retirement Portfolio

Generally speaking, retirement savings accrued during a marriage are part of the marital estate and subject to division. In Missouri, the court will divide retirement savings equitably but not necessarily equally. If you were married to your ex-spouse for more than 10 years, you can access up to 50% of your spouse’s Social Security benefit as long as you don’t remarry and are of retirement age. If you are over 50, retirement account division could be the most consequential financial implication of the divorce. You may have to reassess your retirement plans to make sure your savings are on track.

Should you need the assistance of an experienced divorce attorney in Creve Coeur and O’Fallon or have questions about your divorce situation, know that we are here to help and ready to discuss those questions with you.


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