Do You Have a Financial Plan for Divorce?
By: M. Scott Gordon
If you are thinking about getting divorced in Chicago or the Chicago area but have not fully considered the financial implications, you are not alone. Is one of the reasons you have yet to develop a financial plan that you assume you are good with finances and have the skills and knowledge to handle the economic repercussions of divorce?
According to a recent report in ThinkAdvisor, a poll from TD Ameritrade shows that a majority of Americans are “confident of their financial prowess in the face of these life events,” and thus do not plan ahead. If you are getting ready to file for divorce or if you are even thinking seriously about dissolving your marriage, now is the time to begin making a financial plan.
According to the report, “65 percent of marriage individuals do not have a financial plan in place in the event of a divorce or a spouse’s death, yet 72 percent of men and 62 percent of women expressed confidence in their ability to manage their own financial situation if faced with one of those events.” In other words, a majority of Americans do not have a financial plan in place for divorce, and a majority of those surveyed also believe that they do not need one because of their ability to handle finances. To be sure, the survey also determined that “divorced Americans were likelier to trust themselves than to trust a financial advisor to manage their savings and investments.”
Given that about 40 percent of marriages currently end in divorce, Chicagoans and Americans throughout the country should be thinking about financial plans, especially if they are thinking about filing for divorce. Moreover, many seniors who are already in retirement are also getting divorced, which can result in a trickier and even grimmer financial situation for both parties. According to the managing director for TD Ameritrade, “advance planning could provide a much-needed boost in financial security for those who unexpectedly end up alone at any phase of their lives.” Indeed, we should all have long-term financial plans, and considering divorce should always be part of such plans.
The results of the TD Ameritrade survey also determined that only about 25 percent of Americans who are currently divorced feel that they are financially secure, while more than 40 percent of married people indicated a sense of financial security. On a related note, nearly 50 percent of people who are divorced do not save or invest any of their monthly take-home pay, while only about 30 percent of married people are in this situation. And nearly 50 percent of divorced people surveyed reported that they were concerned about having enough money in divorce.
According to an article from Intuit Mint, understanding your role in the finances of your marriage can help you to prepare for the financial consequences of divorce. For instance, what are the monthly bills in your home, and what percentage of your income goes to pay them? How much do you save each month in your marriage, and how does your salary play into the savings or investments?
Divorce can significantly impact the financial landscape for both spouses, and understanding property division is crucial. The laws concerning property division vary widely from state to state, leading to two primary approaches:
1. Community Property States – In these states, any assets acquired during the marriage are typically considered joint property. This means that, in the event of a divorce, these assets are usually divided equally, with each spouse receiving a 50% share.
2. Equitable Distribution States – Unlike community property states, equitable distribution allows for a fair but not necessarily equal division of assets acquired during the marriage. Courts take into account various factors, such as each spouse’s earning capacity, their contributions to the marriage (both financial and non-financial), and other relevant circumstances. Illinois, for example, follows this equitable distribution approach, which prioritizes fairness over an equal split.
In addition to dividing assets, debt accrued during the marriage also needs to be addressed. Generally, debts are allocated between both spouses, but the specific division will depend on whether the debt is classified as marital or non-marital:
Joint Debts – These are debts that are shared, such as mortgages and car loans, and they are typically divided between both spouses as part of the divorce settlement.
Individual Debts – On the other hand, debts that are solely in one spouse’s name, like personal credit cards incurred before the marriage, are likely to remain with that individual. This distinction can have significant financial implications for each party moving forward.
The financial ramifications of divorce extend to tax implications as well:
Filing Status – Once the divorce is finalized, both parties must file their taxes separately, which can alter their overall tax liability.
Alimony Taxes – One of the more notable changes in tax law came in 2019, when alimony payments were no longer considered tax-deductible for the payer, nor were they required to be reported as taxable income for the recipient. This shift can affect the financial dynamics between former spouses.
Child Support Taxes – It’s important for parents to understand that child support payments are not tax-deductible for the paying parent, nor are they treated as taxable income for the receiving parent. This distinction highlights the unique nature of child support arrangements.
Retirement assets, such as pensions and 401(k) accounts, often play a significant role in divorce proceedings. Depending on the court’s decisions, these retirement funds may be divided between the spouses. In many cases, a Qualified Domestic Relations Order (QDRO) will be necessary to ensure that the division occurs without incurring tax penalties. This legal document outlines how the retirement funds will be split and ensures that both parties can access what they are entitled to.
It’s important to recognize that while divorce itself does not directly impact credit scores, the financial decisions made during and after the divorce can have serious ramifications. For instance, unresolved financial disputes or failure to manage joint debts can lead to missed payments, thereby harming one’s credit score. To maintain financial stability, it’s advisable for both parties to close joint accounts and ensure that they honor any outstanding debts in a timely manner.
Alimony, or spousal support, can be a contentious issue during divorce proceedings. The determination of whether spousal support will be awarded, and in what amount, is influenced by several key factors:
Length of the Marriage – The duration of the marriage plays a significant role in the alimony decision.
Income Disparity – Courts consider the income difference between the spouses, aiming to support the lower-earning party to maintain a reasonable standard of living.
Standard of Living – The lifestyle established during the marriage can also be a factor in determining alimony. Depending on these factors, the courts may order either temporary support during the divorce process or long-term alimony to assist the lower-earning spouse post-divorce.
If one or both spouses own a business, the value of that business is assessed as part of the asset division process. This evaluation can be complex, as courts will examine the financial contributions of each spouse to the business, as well as any direct involvement in its operations. The court aims to reach a fair resolution that recognizes the contributions made by both parties, ensuring that the business’s value is accounted for in the overall divorce settlement.
Our divorce lawyers in Chicago can help you handle the financial aspects of divorce and contend with other matters such as property distribution and child custody. To learn more, contact Gordon & Perlut, LLC today at 312-360-0250.
(Updated 4/17/2025)