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Make Divorce Less Financially Painful

Jan 03, 2021 4 min read Prudential Staff

Key takeaways

  • Reconsider keeping the home, especially if you have children.
  • Talk with a financial expert to gain a clearer picture of your options.
  • If you and your ex can’t agree, consider getting a mediator

 

Divorce can be a stressful event, both emotionally and financially. Along with being a potential cause for marital strife in the first place, financial troubles can follow after a marriage ends.

Recent studies have shown that women in particular can experience financial hardship following a divorce, with around one in five falling into poverty Opens in new window after their marriage is dissolved.

 

 

However, there are steps to take in order to lessen the financial blows following a divorce. Here are some to keep in mind.

 

  1. 1. Rethink keeping the family home

    When dividing assets, both parties may initially want to hold onto the house. This is particularly true in families with children, and especially so for the spouse seeking primary custody.

    Ensuring that the kids stay in the family home may seem the right decision for their emotional health, but in some cases it simply does't make financial sense.

    For example, you might not want (or be able to afford) the costs of keeping the house, from mortgage to maintenance. Similarly, the house may be worth less than you owe on it—and its future value is unpredictable. Also, tax law might not work in your favor (for one thing, the 2017 Tax Cuts and Jobs Act ended deductibility of alimony payments). By selling, you and your ex could split the proceeds, potentially avoid taxes on up to $250,000 in capital gains (for single filers; joint filers can avoid tax on $500,000 in gains), and simply make a “clean break.”

    In other words, a house is not a liquid asset, and it won’t help pay the monthly bills. If cash flow is needed, the right choice might be giving up the family home in order to maintain financial stability. If you do sell, it’s best to use a realtor who’s experienced with divorce-related issues.

     

  2. 2. Seek out benefits

    If the marriage lasted at least 10 years, one ex-spouse may be able to receive Social Security benefits from the other (even if he or she has remarried) if they meet specific qualifications Opens in new window; these include a lower benefit payout than their ex. If one spouse is eligible for benefits and their ex-spouse’s benefit is higher, the eligible spouse will receive a combination of benefits equaling the higher amount.

    A benefit as a divorced spouse is equal to one-half of their ex-spouse’s full retirement amount if benefits are distributed at full retirement age Opens in new window. If the spouse receiving benefits does remarry, they won’t be eligible for their ex-spouse’s benefits as long as the subsequent marriage lasts.

    If one ex-spouse has a pension or other retirement plan, any amount earned during the marriage may also be included in a divorce settlement. A Qualified Domestic Relations Order (QDRO) recognizes the right of one spouse to receive a portion of their ex-spouse’s retirement assets. The QDRO process can vary by state of jurisdiction; the nonprofit Pension Rights Center can give you an idea of how your state handles this division of assets Opens in new window.

     

  3. 3. Get financial guidance

    A financial advisor can guide a couple through the murky waters of divorce financials. They can help minimize the tax burden, explain whether a settlement offer is fair, help both parties understand the QDRO, and assist in valuing investments.

    In addition to saving money and supporting a fair distribution of assets, a financial advisor can help protect both parties from making emotional decisions. Just as some spouses want to fight for their share, others are so emotionally bruised they may walk away from what they’re entitled to. A financial professional can help both of you avoid these types of potentially regrettable decisions.

     

  4. 4. Consider a mediator

    A professional mediator is a neutral third party who helps divorcing couples agree to terms. Mediators do not act as judge, or steer the proceedings in any direction.

    Mediation can be a great way to divorce without unnecessary acrimony and infighting. If the relationship between exes is such that they can reach a fair, equitable settlement on crucial issues—alimony, property division, child support and custodial rights—a mediator can save a bundle in emotional turmoil and legal fees.

    However, mediation is inappropriate in some cases. Should one spouse suspect the other of concealing income or assets, or if either party refuses to compromise, the situations is best suited for a court of law.

 

What you can do next

Meet with a financial professional, who will be able to help you make the most informed decisions regarding your finances following a divorce. Also, discuss whether getting a mediator would make the proceedings easier. And if you decide to sell your home, talk to a real estate agent with experience in divorce.

 

If available to you, you should also consult with a tax and legal advisor regarding your particular circumstances.

Footnotes

Prudential's editorial team has deep experience in guiding readers on personal finances, retirement saving and planning for the unexpected.

 

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