Understanding the Financial Consequences of Divorce

Date Published: Oct 25, 2024
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Divorce is a tough time for any couple. About 43% of first-time marriages in the U.S. end in divorce, according to Forbes. It is a period of resentment and emotional stress for many people. Adding to the pain are the financial consequences of divorce that take their toll as well.

As your buddy in all things finance, we are here to offer wisdom and support to help you through these troubled times. Let’s look at what money problems you can have after divorce.

Key Takeaways

  • On average, divorced people need to increase their income by about 30% to maintain the same standard of living.
  • Men usually experience a 23% drop in income, while women see a decline of 41%.
  • Deciding whether to sell or refinance the marital property is one of divorce’s most significant financial considerations.
  • Divorce can also lead to expenses such as child support or alimony.

Monthly Budgeting After Divorce

It’s estimated that divorced individuals need around a 30% increase in income to maintain the same lifestyle. Think about it – most lose roughly half of their household income streams, as they will now be a one-person household.

woman in orange shirt remove the ring from the finger

Divorce affects men and women differently, often leading to significant financial problems Research shows that men’s household income falls by about 23% after divorcing, while women typically experience a harder financial hit with a 41% decline.

One of the most significant changes in monthly budgeting concerns housing costs. After a divorce, usually one or both spouses move to another home, and living expenses naturally increase. Whether it’s mortgage, rent, or housekeeping, all these housing expenses now fall on the shoulders of one individual instead of two.

Next, expenses like child care become more pronounced as you transition to a single-parent household. Additionally, suppose you previously had access to your spouse’s health insurance plan, or you had a joint plan. In that case, you will usually lose access and must pay for your coverage separately, adding to your monthly expenses.

In general, an overview of your finances becomes necessary as priorities usually shift. In most cases, essential expenses like groceries or rent take precedence, while discretionary spending becomes a luxury.

Impact on Credit Score

Your relationship status doesn’t directly affect your credit score. However, if you have joint accounts, these can impact your credit.  Unless you close your accounts or remove your ex-spouse’s name from them, they will continue to appear on your credit report, and you will both continue being legally responsible for them.

Many people remain authorized users on their spouse’s credit cards. If your ex-spouse revokes your access to the card, your credit utilization ratio will increase as your credit limit decreases. High credit utilization can hurt your credit report.

Housing Considerations after Divorce

Deciding what to do with the marital home after the divorce is one of the main financial decisions you must make. Let’s break down the options to see what might look best for you:

  • Sell Your House: Many couples choose to sell their jointly owned home and split the proceeds. This might be the easiest option, but keep in mind that fees may incur along the way, including Realtor’s commissions, home staging, and capital gains taxes.
  • Refinance Your Mortgage: If one person decides to keep the home, they must refinance the mortgage to remove the other spouse from financial obligations. In this case, refinancing can take one of these forms:
    • Conventional Refinance: This straightforward approach involves negotiating new terms and conditions with the lender.
    • Streamline Refinance: This option is available for FHA, VA, and USDA loans, making refinancing simple using existing loan documentation. 
    • Cash-Out Refinance: This option lets one spouse take out a portion of the home’s equity as cash, which can be used to pay off the other spouse.
  • Buy Out Your Spouse: If you decide to keep the house, you can buy out your ex’s equity share. Suppose your home is valued at $400,000, and you still owe $200,000 on the mortgage. In a straightforward 50/50 split, you must pay your ex-spouse $100,000 to buy their remaining property equity.

Child Support and Alimony

Child support and alimony are other payments that you’ll need to sort out if you have children. If one of the parents becomes the child’s custodian, the other parent may need to pay child support to cover the child’s expenses. The amount usually depends on each parent’s income, the number of children, and the custody arrangement. If you fail to do so, you may face legal consequences.

sad boy and parents who are arguing on the behind

On the other hand, if you are receiving alimony or child support, this income should be incorporated into your budget. Conversely, if you make these payments, you should account for them as fixed expenses.

As of 2019, alimony payments are no longer tax-deductible, while child support continues to be non-taxable.

Retirement and Long-Term Financial Planning

Finally, divorce’s financial consequences also imply reconsidering your retirement accounts and long-term financial planning. Typically, retirement savings accumulated throughout marriage are considered part of the marital estate and subject to division.

The division depends on whether you reside in a community property estate, where retirement savings are split equally, or an equitable distribution state, where assets are divided fairly but not necessarily equally.

For those who were married for more than 10 years and have not remarried, you have the ability to access up to 50% of your ex-spouse’s Social Security benefit when you reach retirement age. Remember that this doesn’t affect your ex-spouse’s right to their amount, as the government covers any difference.

After the divorce, it might be necessary to reassess your retirement strategy. Many people find that the assets they’ve counted on for retirement are now reduced or reallocated. Professional help from licensed financial experts and tools like Betterment or Wealthfront can help you tailor your investment portfolio to your changed personal and financial situation.

Going through a divorce is definitely not the easiest, but just like everything in life, it will pass. While it does leave its emotional and financial mark for years to come, being prepared and knowing what to expect can make the transition to this new chapter in life less stressful.


Senior Content Creator, Financial Consultant
Avery Quinn is a Senior Financial Consultant with 5 years of experience, specializing in wealth management, retirement planning, and tax optimization. Avery provides personalized solutions and actively contributes to financial education as part of the Buddyloans.com team.

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