This guest post comes from JR Diamond.
Your bill payment calendar will probably look quite a bit different after a divorce.
A 2012 study showed that over 45% of divorcees, both men and women, experience a substantial drop in income after a divorce. Forty years ago, the numbers were much different: nearly 70% of divorced women but only 30% of divorced men saw their incomes decline.
What’s more, this financial study found that only remarriage could reliably end the income tailspin. Divorced women, for example, are much more likely to be impoverished senior citizens than widowed women or women who never married. These figures may be one reason the divorce rate was flat between 2007 and 2009, the depths of the recent recession.
Many people are taken aback by the income loss because, quite frankly, they have failed to anticipate some key short-term financial divorce costs. Matthew Kremer, a divorce lawyer in San Diego, most often sees this failure of anticipation in his trauma-driven divorce cases. He explains that some couples divorce because of a sudden trauma in the marriage, such as an affair or a medical diagnosis. Such parties often rush to file divorce papers as an emotional reaction to that trauma.
- The legal fees in a divorce can be enormous, even in cases with few contested issues. To avoid the complete dissipation of savings and over-reliance on credit, many divorcing couples turn to mediation. The average divorcing couple has less than $20,000 in assets, so mediation makes financial sense in many cases.
- For other people, the financial surprise comes in the mail after their divorce decree is signed: the letter from their insurance carrier that their group health benefits have been terminated. For people who relied on their ex-spouses’ health benefits because they could not afford their own coverage or they had a preexisting condition, the loss of health benefits can be a very, very serious blow. Legal separation is available in some states, including California. Mr. Kremer sometimes recommends legal separation in these cases, because the spouse are technically still married but are divorced for all other practical purposes.
As noted earlier, the lost income after divorce is sometimes never made up. The financial ramifications of divorce continue even after a person receives a raise or promotion.
- If you had counted on the full value of your retirement plan to give you an income stream in your golden years or to serve as an emergency cash reserve, think again. A retirement plan is community property and, like a house or car or any other physical property, the retirement plan is divided upon divorce. The technical term is a Qualified Domestic Relations Order (QDRO, pronounced quad-ro). The precise rules vary according to the jurisdiction, the employer and the type of plan.
- Take care that the tax burden is equitably shared to the greatest extent possible. A rent property is a common example. Spouse A may obtain a rent house in the divorce and look forward to the extra income, but fail to anticipate the property taxes.
You take a great deal of pride in the fact that your financial life is reasonably well-organized and that you are always in a position to meet your obligations. Don’t let divorce change that.