Dividing Material Assets in a Divorce
Over the course of a marriage, assets are acquired as a couple. It can be very complicated as finances have become enmeshed through the years.
Creating an inventory of your combined assets, along with their estimated values, can provide a clearer understanding of what is at stake during the divorce proceedings.
Gathering all necessary documentation can streamline the process. Documents may include the following:
- Bank statements
- Card statements
- Property deeds
- Tax returns
While some assets may hold sentimental value, objective analysis of their financial impact is vital.
Depending on the jurisdiction and specific circumstances, the division of marital assets can follow different models. Some states adhere to the principle of equitable distribution, which aims to divide assets fairly but not necessarily equally.
Others adhere to community property laws, where assets are split equally between the spouses. Understanding the laws governing your divorce jurisdiction is essential to navigate this process successfully.
Another aspect to consider during the division of marital assets is debt. Joint debt accumulated during the marriage must also be addressed and fairly distributed. These debts may include the following:
- Credit card debt
Retirement Accounts and Pensions
Retirement plans, such as 401(k)s or IRAs, are typically considered marital assets if they were funded during the course of the marriage. These accounts can hold a substantial amount of money and play a significant role in ensuring financial stability during retirement.
To protect their interests, individuals involved in a divorce should consult with a financial planner or analyst who specializes in divorce financial planning. These professionals can provide guidance on valuing retirement accounts and pensions accurately, as well as help explore various options for dividing these assets.
Also, consider the tax implications associated with dividing retirement accounts and pensions. Depending on how these assets are split, the receiving party may have tax consequences.
Pensions are often considered marital property if they were acquired during the marriage. Depending on the specific circumstances, the non-employee spouse may be entitled to a portion of the pension benefits.
Child Support or Spousal Support Payments
Child support payments are meant to ensure that the custodial parent has the necessary financial resources to support the child’s needs. The amount of child support is typically determined based on several factors, including the income of both parents, the number of children, and the custody arrangements.
Spousal support, also known as alimony, is financial support provided by one spouse to the other after a divorce. This type of support is usually awarded when there is a significant income disparity between the spouses or when one spouse has given up career opportunities to support the family during the marriage.
The amount and duration of spousal support depends on various factors, such as the length of the marriage, the earning potential of each spouse, and the standard of living established during the marriage.
Both child support and spousal support payments are typically legally binding obligations, and failure to comply with these obligations can result in serious consequences. Non-payment or late payment of court-ordered child support can lead to legal action, including wage garnishment, suspension of driver’s licenses, or even imprisonment in some cases.
Financial Credit Score and Divorce
Failure to pay debts, even if the divorce decree assigns responsibility to the other party, can negatively impact both credit scores. Closing joint accounts or removing one person’s name from them can help prevent any future financial mishaps from affecting both parties’ credit.
Divorce can also impact an individual’s credit score through changes in income and financial stability. Transitioning from a dual-income household to a single income can result in challenges in meeting financial obligations, such as mortgage or car payments.
Late or missed payments can significantly damage credit scores and make it harder to obtain credit or loans in the future.
When going through a divorce, prioritize maintaining a good credit history. This means making all bill payments on time, fulfilling financial obligations, and keeping credit card balances low. It may also be necessary to create a new budget and ensure that expenses are aligned with the new financial circumstances post-divorce.
Divorce can have significant tax implications that both parties involved need to be aware of. One important aspect to consider is the filing status. Once divorced, you are no longer able to file jointly, which can affect your tax bracket and potentially result in higher tax rates.
The division of assets and property can have tax consequences. For instance, selling or transferring assets during the divorce process may trigger capital gains taxes.
Alimony payments, though no longer deductible for divorces finalized after 2018, may still be taxable income for the recipient. Child support payments, on the other hand, do not have any tax implications.
Consult with a tax professional or attorney to fully understand the tax impact of divorce and how it will affect your financial situation.
Health Insurance and Divorce
In many marriages, one spouse may be covered under the other spouse’s employer-sponsored health insurance plan. However, once the divorce is finalized, that coverage may no longer be available.
Losing health insurance coverage can be particularly concerning if you have pre-existing medical conditions or dependents who rely on your insurance. Understand your options and take proactive steps to maintain coverage for both yourself and your dependents.
Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), you may be eligible to continue your health insurance coverage for a limited period of time after the divorce. COBRA allows you to maintain the same coverage you had during the marriage, but you will be responsible for paying the premiums yourself.
While COBRA can provide temporary coverage, consider the cost. Without the employer’s contribution, the premium can be significantly higher, and for many individuals facing the financial consequences of a divorce, this may not be a viable long-term solution.
You can explore the marketplace established under the Affordable Care Act (ACA) or contact insurance brokers who can help you find the most suitable plan based on your needs and budget.
Another option is to seek coverage through your employer if you are employed or through a new employer if you are actively job searching. Carefully review the health insurance plans offered and consider factors such as premiums, deductibles, and coverage for pre-existing conditions.
 Wilder, I. (2023, August 21). 7 common ways a divorce can change your personal finances. CNBC. https://www.cnbc.com/select/common-costs-of-divorce/
 Garcia, J. (2022, June 3). The Financial Impacts of Divorce. Coldstream Wealth Management. https://www.coldstream.com/insights/the-financial-impacts-of-divorce/
 Gravier, E. (2023, August 1). Divorce can cause your credit score to plummet—experts say take these 4 credit steps beforehand. CNBC. https://www.cnbc.com/select/what-to-do-with-credit-before-divorce/
 Miczulski, M., & Lafuente, C. (2023, April 3). 8 Surprising Ways Divorce Can Impact Your Finances. FinanceBuzz. https://financebuzz.com/ways-divorce-can-impact-finances