The Economic Cost of Divorce
Divorce is not only an emotionally taxing experience, it can be hard on the parties financially as well. The uncertainty of the process, especially for those getting divorced for the first time, can create a lot of stress. And one of the things many divorcing spouses are uncertain about is how they will be able to pay for it, and how they will make it financially after the process is complete.
The economic cost of a divorce extends far beyond the costs the spouses incur during the process itself. The income between the household is split, and issues such as division of marital assets, alimony and child support must be worked out. There are also tax implications that must be factored in as well.
The cost of living in the area in which the divorce takes place is another element that factors into the divorce cost. For example, as of the end of 2018, the median home price in Dothan, Alabama was $141,000, while the median home price in Tallahassee, Florida was $172,000. Aside from purchasing a home, the overall cost of living in the Dothan, AL area is lower than in most Florida cities.
The Economic Impact of a Divorce
A divorce can affect your financial life in numerous ways. Here is a look at some of the economic costs that spouses will incur:
Legal Fees
The cost of filing for a divorce and finalizing it with the courts can run into the thousands or even tens of thousands of dollars, depending on the situation. Even if the spouses settle the divorce amicably and without attorneys, it will still be at least several hundred dollars to file the paperwork and other court costs. That said, most couples that reach the point where they want to split up are not on amicable terms. At the very least, there is likely a loss of trust between them, and it is almost always in both parties’ best interests to retain skilled legal counsel.
In most situations, both spouses will have to pay for legal teams, and lawyers may charge on an hourly basis or a flat fee. If there are children involved, high value and/or unique assets to divide, and other complex factors, it will require several hours of time on the part of the attorneys to prepare the case and negotiate a settlement. And if divorce litigation is necessary, the costs will increase significantly. According to Martindale Nolo Research, the overall average cost for a divorce in Alabama is $12,500, while the average cost for a divorce in Florida is $13,500.
Reduced Net Worth
During the divorce, marital assets are divided equitably, meaning in a “fair and equitable” manner. This does not necessarily mean 50/50, although that is often the presumed starting point for negotiations. What a spouse ends up with depends largely on specific factors, but the point is that after the divorce, each spouse is going to lose some of the marital assets. The value of certain assets may also be diminished if they have to be liquidated quickly, such as a house that needs to be sold right away. Another common scenario is a family-owned business in which one spouse has to buy out the other, which may mean taking on extra debt that cuts into the profits of the business and ultimately that spouse’s income.
Reduced Standard of Living
A divorce splits one household into two. And since one of the spouses will usually have to find a new place to live (unless they are moving in with a new partner), each spouse will have to spend more of their monthly income on costs such as mortgage or rent, utilities, and other related expenses. If there are kids involved, one spouse will likely be paying child support, and alimony/spousal support may also be awarded. When ex-spouses now have to support two households (between each other) instead of one with the same overall income, it lowers everyone’s standard of living.
Tax Consequences
Without careful planning, a divorce can create numerous surprises at tax time. For example, some marital assets that are liquidated may involve tax liabilities, such as stocks or non-homestead real estate properties that may incur capital gains taxes. Another issue is alimony. As of 2019, the spouse paying alimony can no longer deduct those payments on their federal income taxes. These and other potential tax implications should be dealt with during the divorce process in order to minimize the negative consequences.
Helpful Tips to Lessen the Financial Impact of a Divorce
1. Assess Your Financial Situation
In many marriages, one party is often in the dark about finances. As a result, they tend to get caught off-guard in the event of a divorce and end up getting the short end of the stick. Make sure it does not happen to you.
Gather all your financial documents and find out what you own separately, what you own jointly with your spouse, how much debt you have, and how much of it is shared by your spouse.
Here is a brief list of documents you should go through to get a clear idea of your financial situation.
- Savings and checking account statements
- Credit card statements
- Retirement account statements
- Documents related to your investment accounts
- Documents related to your auto loan, business loan, personal loan, and mortgage
- Documents related to assets you owned prior to your marriage
- Documents related to assets you acquired after your marriage
- Income tax returns
Make sure you have sufficient funds in your accounts (your own accounts, not jointly held accounts, as the funds in these accounts can be accessed by your spouse as well) to pay for the expenses associated with the divorce.
2. Track Your Household Expenses
From the moment you decide to get a divorce, keep track of your day-to-day expenses (food, household bills, clothing, transportation, entertainment, childcare, insurance, and so on) as well as occasional expenses (holiday trips, repair and maintenance, home improvement, and so on). This is important because your household expenses are one of the factors that the court will take into account while dividing your marital assets and while determining the amount of spousal support and child support to be paid.
3. Close All Joint Accounts
Once you decide that you are going to get a divorce, it is a good idea to close all joint accounts and transfer your share of the funds into a new account. Otherwise, your spouse might – knowingly or unknowingly – spend money that belongs to both of you, which can lead to unnecessary confusion and quarrels.
Similarly, it is advisable to cancel all jointly held credit cards and transfer your portion of the debt into a new account. It is particularly important if you believe that your spouse is angry with you (in case of a fault or contested divorce) and might try to rake up debt just to spite you. However, if you and your spouse are unable to decide as to how the funds in your joint accounts and your credit card debts should be divided, it is advisable to consult with each other’s divorce attorneys and then make a decision.
4. Try to Buy Out Your Spouse’s Equity
Your spouse is likely to have considerable equity interest in your marital home and your business (if they contributed to it). Rather than selling your home and business and dividing up the proceeds, try to buy out your spouse’s equity interest so that you can keep your home and business to yourself.
5. Opt for Mediation Instead of Litigation
A long, drawn-out legal battle with your spouse is the last thing you want, as it can be messy and expensive. By opting for negotiation or mediation, you can avoid the cost of litigation, which can be quite substantial. Choose a divorce attorney who represents clients with alternative dispute resolution mechanisms that can help spouses resolve the marriage more amicably, such as mediation. Help your spouse understand that neither of you stands to benefit from taking the case to court and get them to agree to negotiation or mediation. You can not only save money by doing so, but can also find creative, out-of-the-box solutions to contentious issues like child custody, visitation, and support – which might not be possible if your case goes to court.
Speak with an Experienced Alabama and Florida Family Law Attorney
There is no doubt that the economic cost of divorce is significant, but if spouses reach the point where they clearly have irreconcilable differences, no amount of money is worth continuing to endure an unhappy marriage. At Smith Law Firm, we understand that divorce is a painful process both emotionally and financially, and we work closely with our clients to provide skilled legal guidance and moral support, and to help mitigate the economic costs as much as possible. To schedule a personalized consultation with one of our attorneys, contact us today at 334-702-1744. You may also send us a message through our online contact form.
