Can You Afford to Get Divorced?

Can You Afford to Get Divorced? - Make It Better

When you make the painful decision to file for divorce, you know there will be some expenses, namely legal fees. But, the end of a marriage can trigger all sorts of costs, many of which soon-to-be-ex spouses don’t anticipate because they are (understandably) mired in the emotional aspects of splitting up.

One big increased expense after divorce is taxes. For starters, you can no longer file joint returns, which is the most advantageous status for many couples. Chicago divorce attorney, mediator and coach Karen Covy, who is also a member of the Collaborative Law Institute of Illinois, says divorce settlements can trigger taxable events — for instance, when you sell off a portion of an IRA. And remember that while child support is not counted as taxable income, you will be taxed on alimony that you receive.

Divorced women who stayed home to raise children are also very likely to rack up expenses to get back into the workforce. You may need to get some additional education or take certification courses. At a minimum, you’ll have to update your professional wardrobe.

“Another hidden cost is health insurance. In a family, all of the people are on one policy. When you split up, it’s every person for themselves, and health insurance is expensive like crazy,” Covy says. “It’s not only the cost of the premium, but a lot of divorced people have a huge deductible in order to have a premium they can afford, and they are responsible for the whole deductible because it’s no longer a family deductible.”

Both spouses should also plan to spend money on therapy. While working out your emotional issues may seem like a luxury, Covy says not dealing with anger and resentment can end up costing you real money. She recalls a case in which the exes racked up significant legal fees battling over every last asset — down to a run-of-the-mill vacuum cleaner. Clearly, their negative emotions were clouding their financial prudence.

“Divorce is about 20 percent legal and financial and 80 percent emotional,” Covy says. “So if you don’t deal with your emotions, what happens is you spend hours, days, years fighting in court over stuff you really don’t even care about — you are just mad.”

For most couples, their most significant asset is the family home. Emotionally, it often makes sense for women, particularly those with young children, to fight to keep the house. But Danielle Schultz, a certified divorce financial analyst in Evanston, says that financially, it could be a bum deal. You have to take into account all of the expenses that come along with the house — from property taxes and routine maintenance to landscaping and housecleaning costs.

“The woman often bargains for this as a way to keep the children rooted, but then the spouse walks away with all the investable assets, which do appreciate and do generate income,” Schultz says. “Then, the kids go off to college and she’s stuck with an albatross she has to pay to maintain.”

That problem is compounded for women when they realize they can’t afford to maintain the house and then try to sell. At that point, Covy says you’re likely to incur a bunch of expenses (repair and staging costs, realtor and broker fees, closing costs) that you can no longer split with your ex. Her bottom line: If there’s any doubt you can afford the house, sell it before the divorce is finalized.

Schultz also reminds people to be realistic when creating the budget statement that will help determine your settlement. You’ll do yourself no favors by low-balling these figures.

“Often people (especially mothers) are very proud of how little they spend on themselves or how very frugal they have been,” Schultz says. “This is a big mistake, as the opposing side and the courts will conclude that very little is actually needed for support.”

As difficult as it may be to collaborate with your ex during a divorce, Laurie Barry, senior VP at UBS Financial Services, says a little teamwork will leave you both in a better financial position. She recommends working with a mediator to identify hot-button issues before you start racking up hefty legal fees fighting about the division of assets. And, this is definitely a time to choose your battles carefully. Think about the things you truly want to end up with, and don’t argue about the rest.

“You might become a stickler about airline points, for example, because you think you deserve them because you were at home with the kids when your husband was travelling for work and racking up all those miles, but really, you don’t even need the points and really you want something else,” she says. “If you can vet that ahead of time, I think it’s more productive. Realize that there are some things he may really want that you can easily give up.”

Most people, especially high-net-worth individuals, business owners and high-profile community members, would not want the details of their financial affairs made public. But, when you step into a courtroom for divorce proceedings, you surrender your privacy.

“The court file is a public record, so if you drag your husband or wife into court and start arguing about everything in the world, a reporter or anybody else can sit in there anytime and listen to your dirty laundry,” Covy says.

That’s why she recommends making every attempt to settle via mediation or collaborative divorce, in which you assemble a team including lawyers, financial advisors and other professionals to help you negotiate an agreement out of court. Covy says she has had clients who are multi-millionaires with complicated financial scenarios reach settlements for less than $5,000 in legal fees by doing a collaborative divorce.

“Collaborative divorce and mediation are focused on helping preserve some sort of relationship between spouses, so you can talk to each other when bumps in the road come up, so you don’t end up back in court,” Covy says. “If you can maintain a civilized relationship, that goes a long way in keeping you out of court and saving you money you didn’t even realize you were going to spend.”

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