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Divorce is a long and difficult process, both emotionally and logistically. It can also do great financial harm to both parties. While no time is ideal to get a divorce, certain times are better or worse financially than others. Here are five events that can affect the impact a divorce has on your wallet.
1. Unstable real estate market
When the real estate market is soft and a glut of houses is on the market, you can burn through the equity in your home if you have to sell it in a divorce situation. On the other hand, in a hot market, you can capitalize on the value of your house and sell it quickly. The least expensive solution is to work the divorce settlement so that one spouse gets to stay in the house and the other spouse takes other assets to compensate for his or her share of the equity. This avoids real estate fees, land transfer taxes and other costs of selling and moving.
2. Shaky economy
The overall state of the economy can impact the financial blow a divorce can deliver. A divorce can mean one or both spouses may have to rent or buy new houses, purchase new cars and even change jobs. In a shaky economy, all of these things can be difficult. Credit is harder to obtain and jobs may be scarce. In a robust economy, all of these necessities may be easier but large purchases, such as houses and cars, may be more expensive.
3. Damaged credit score
If you have a bad credit history, a divorce is only apt to make it worse. A credit report is often needed to rent an apartment, interview for a job or even open a credit card in your name. You may be unable to live the way you are financially used to living. If the split is amicable, it may be worthwhile to wait several months to a year until you can work on raising your credit score. If you are the spouse with the credit damage, try to negotiate keeping the existing house and car so that you do not have to face creditors in the near future.
4. Having children under 18
Divorce becomes exponentially more complicated when minor children are involved. Custody issues must be worked out and financial support arrangements put in place. You and your spouse will have less combined income with which to support the children, as you will each have separate living costs. If you have children heading off to college, one benefit of your divorce is that they may be eligible for student loans and grants for which they might not otherwise have been eligible. Many student aid plans only require including the income of the custodial parent when assessing eligibility for financial aid.
5. Receiving an inheritance
State laws vary on how community property must be divided between spouses in a divorce. Most, however, do not look forward. That means that future assets or income of either spouse cannot be divided and treated as part of the divorce assets — although they might change any child support order. If you inherit money from a relative or acquaintance before your divorce is final, it may become part of the marital assets. If, however, you inherit money after your divorce is final, you will likely get to keep it all. (Contrary to popular belief, inheriting assets isn't always a good thing.)
The bottom line
Divorce is rarely financially advantageous to either party. There are times, however, when it can have an even deeper impact on your personal economic situation.
More from Investopedia
- Get through divorce with your finances intact
- The importance of your credit rating
- Refusing an inheritance
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