Rebuilding Your Finances After Divorce

Divorce isn’t just emotionally complex but also financially intricate. According to Forbes, legal fees can vary widely depending on the length and complexity of the case. Even amicable divorces can cost thousands of dollars due to attorney retainers, court filing fees, and document preparation costs.

Divorce also results in significant lifestyle changes, especially for the lower-earning spouse. The transition from splitting living expenses to operating on a single income can cause some financial whiplash, affecting everything from housing arrangements to your long-term earning potential. As you adjust to your new normal, know that these shifts are part of the process, and with time, you will adapt to your new financial reality.

Dividing property can be one of the most complex parts of the divorce process. InCharge Debt Solutions explains that the value of real estate, retirement accounts, and personal property must be assessed carefully, and state laws determine how assets are split (it is not always 50/50).

It is also essential to understand the difference between marital and separate property. Marital property includes anything acquired during the marriage, such as joint savings, checking, investments or a family home. Separate property might include gifts, inheritances, or anything you owned before the marriage. It's a good idea to consult a legal advisor before making changes and to understand your state's law.

As for debts, mortgages, credit card balances, student loans, and personal loans may be divided between spouses, particularly if you are a co-signer on any contracts. Be sure to clarify what debts you are responsible for and update all associated accounts accordingly.

Following a divorce, financial support often comes in two forms: alimony and child support.

FindLaw explains that alimony may be awarded on a temporary, rehabilitative, or permanent basis depending on how long you were married, each spouse’s income, and the standard of living established during the relationship.

Child support is calculated based on custody arrangements, how many children you have, and parental income. It may also include additional support for healthcare, schooling, and extracurricular activities. The parent with primary custody is usually entitled to receive support, but it's important to understand your state’s guidelines.

As you step into this next phase, don’t overlook long-term planning. Divorce often requires dividing retirement assets like 401(k)s, pensions, and IRAs. If applicable, a Qualified Domestic Relations Order (QDRO) is necessary to divide these accounts without tax penalties.

If you are eligible to collect Social Security, it is important to understand how divorce may impact your benefits. David Stolz, CPA/PFS, explains, “Social Security benefits may be available to a divorced spouse if the marriage lasted at least 10 years.” That benefit can be especially important for older adults nearing retirement.

Taxes can also get complicated. After divorce, you’ll likely change your filing status and may lose deductions or credits you previously qualified for. Benefits like the child tax credit are typically awarded to the custodial parent. You’ll also want to understand how alimony or property transfers may affect your taxable income.

Insurance is another area that needs your attention. If you were previously on your spouse’s health plan, you will need to find separate coverage. Courts may require one spouse to maintain life insurance to secure ongoing child support or alimony payments.

Managing your finances after a divorce can be overwhelming, and it can help to have a professional with the knowledge and experience to guide you. One of the best steps you can take after a divorce is to meet with a financial advisor to help frame your financial decisions and set reasonable expectations during this transition. They can also:

• Create a personalized plan to help you stay on track for long-term goals like retirement
• Clarify the true value of your assets and help you understand the tax implications
• Provide peace of mind as you manage your finances independently

Rebuilding your financial life after a divorce can feel daunting, but you don’t have to do it alone. With careful planning, clear goals, and the right team in your corner, you can gain control of your finances and move forward with strength and optimism.

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