divorce and your credit score

How Will a Divorce Affect my Finances?

Whether you are in Auburn or anywhere else in Alabama or around the country, getting divorced is expensive. Not only will there be large one-time costs to pay for attorney fees, legal filings, etc., there are also likely to be some adverse ongoing financial consequences as well.

About one out of every five women fall below the poverty line after a divorce, and most men experience a large drop in their standard of living as well. A divorce can also have adverse financial effects on the children.

Here are some of the most significant ways an Auburn divorce may affect your finances:

  • Lower Income: Although Alabama law calls for the payment of child support and in some cases spousal support, those payments will be less the combined income the couple had when they were together. The paying spouse will also have a reduced income because of the payments, which means that both spouses will probably have a lower standard of living at least in the short term.
  • Fewer Assets: When you are married, you own all of your assets together. After the division of property, you will probably end up with around half of the marital estate. This, of course means a lower bank account balance, less money in your retirement account, and a diminished amount of other property.
  • Higher Expenses: When a couple gets divorced, they are now faced with having to support two households on the same combined income. This means double the housing payments, double utilities, and probably higher food costs as well.
  • Damaged Credit: Your credit is not directly affected by a divorce; in other words, the credit reporting agencies will not lower your score simply because your marriage was dissolved. However, the indirect effects of a divorce can damage your credit score. For example, your spouse could run up credit card bills on a joint account that has your name on it. Or you might have to use more of your available credit to cover short-term expenses. Either of these or similar scenarios can result in a lower credit score.
  • Fewer Opportunities for Children: With a diminished income, you may not be able to afford some of the “extras” that you want for your children, such as paying for sports leagues, music lessons, extra tutoring, or private school. It might also be more difficult to contribute to any college fund you have set up for your kids.
  • Tax Consequences: Once you are divorced, you will have a different filing status and you might end up in a different tax bracket. There may also be other tax implications if you have to sell the marital home, sell a business, or make other major financial decisions.

Tips to Lessen the Financial Impact of an Auburn Divorce

  1. Find Someone to Mediate

Using a mediator, if possible, can save you a lot of expense as compared to the money you will end up spending when you go through the court system. It requires speaking to your ex so that both of you concur on the terms of your Auburn divorce.

  1. Set Up Powers of Attorney

Initiating the required documentation to ensure you authorize someone to speak on your behalf in the unfortunate event of your incapacitation, can help you avoid unnecessary expenses and the inconvenience of guardianship. Try to establish health care and financial powers of attorney first thing after your separation.

  1. Modify Your Legal Documents and Beneficiaries

Review your life insurance policies, bank accounts, and retirement accounts, to check if any of these have a transfer on death. Not modifying the beneficiaries may result in your ex getting the proceeds in case some misfortune befalls you. You will need to scrutinize all your legal documents, including powers of attorney, wills, and trusts, and ensure to expunge your ex from each one of them. Add appropriate individuals in your legal documents to protect your assets from getting transferred to the wrong person.

  1. Revise Your Credit Report

Apart from opening your own bank accounts and canceling any joint ones that you have from the marriage, you also need to review your credit report to make sure you and your ex are no longer authorized users of each other’s credit cards. 

  1. Devise a New Estate Plan

A divorce is undoubtedly a massive event in anyone’s life, and any big life event calls for a review and revision of your estate plan. You may need to incorporate alterations in your will if you have children, but even if there are none, there may be many documents that need updating, considering your new status.

  1. Assess Your Retirement Savings

Transfer any funds you may have been awarded from the retirement benefits of your ex as part of your divorce settlement in Auburn to your IRA. This will ensure greater flexibility in investment options and a chance to employ these funds in secured growth opportunities.

  1. Reallocate Your Investments

If there are any investments that your ex did on your behalf, analyze and reevaluate them with the help of a financial advisor. See if these are right for you in your present circumstances, keeping your investment goals and risk tolerance in mind. An investment advisor can help you revamp asset allocation, discover alternative investments, and figure out the tax consequences.  

  1. Consider the Social Security Benefits

If your marriage lasted for at least 10 years, you may be eligible for higher Social Security benefits. These higher benefits will be based on your ex-spouse’s income, provided you never remarry. You may lose your eligibility for these benefits if you decide to remarry, and your new marriage lasts for more than 10 years. Consider the impact of remarriage on your Social Security benefits from the previous marriage.

  1. Make a Budget

Take into account the needs of your new lifestyle, and the reduced income level. You need to incorporate changes in your budget so you can continue without much reduction in your lifestyle. Additionally, you must be able to save sufficiently to recoup from any financial fall-out due to your Auburn divorce, and at the same time, achieve your retirement goals.

  1. Contemplate Disability Insurance

A common fear among both men and women after a divorce is not having financial backup or support in the event of a financial setback like getting fired from work due to an illness or injury. Disability insurance could be a viable option to allay these fears, with its provision of a monthly disability benefit payment if you are unable to work because of injury. It is not a cheap option, but it can save you from financial ruin in case of a long-term disability.

Additionally, if it’s not too late, you could consider asking for a postnup agreement. This will separate the debts you and your spouse had before you got married.

Surviving Financially after an Auburn Divorce

What we have discussed so far in this article sounds pretty grim. But this is reality – divorce is hard financially, and you need to be mentally prepared for it. So even if your spouse has always been responsible for paying the bills or contributing to your retirement account, that doesn’t mean you can’t get involved now. You should be able to access your bank, retirement, and investment accounts, as well as learn about any other aspect of your finances.

All of that said, getting divorced does not mean you will have adverse financial circumstances forever. There is definitely an adjustment period, but you will get through it, and many people even come out financially stronger on the other side.

Here are some ways to deal with the financial impact of a divorce:

  • Understand your Finances: Take an inventory of your income and assets, so you have the full picture of what you will be dealing with going forward.
  • Decide What you Can Afford: It may be tempting to want to stay in the marital home for sentimental reasons, but it might not make financial sense to do so. Take a look at what housing payment you can afford and plan accordingly.
  • Create a Realistic Budget: Understand that you will need to live on less and make a budget that you will stick to. Budgeting is not the most enjoyable thing to do, but your ability to live within your means is the first step toward financial freedom.
  • Protect Your Credit: Take immediate steps to mitigate the effects of the divorce on your credit. Close any joint credit accounts so your spouse will not be able to cause you any damage. Also, try to open some accounts in your name only, so you have more available credit in case you need it.
  • Think About Ways to Increase your Income: Your income will take a short-term hit, but it does not have to stay this way forever. If you are not already working, consider re-entering the workforce if that is an option for you. You may also want to look at getting additional schooling which might open the door for better opportunities, or if you have an entrepreneurial spirit, maybe there is a business you have always wanted to start but felt inhibited to do so by your marriage.
  • Seek Professional Financial Guidance: Not everyone is strong in the area finances, and you might need some professional help to get you grounded in this area. If so, find a reputable financial advisor who can help you create a solid plan going forward.

Whether you are married or divorced, you should always keep learning about money management. This includes reading books and listening to podcasts from financial experts, as well as going to a financial advisor if you need help.

You can also download apps like YNAB and Mint, which will connect to your bank account and track your spending as well as assist you with creating a budget. For example, you could create a 50/30/20 budget, where 50% of your money goes to needs, 30% goes to wants, and 20% goes to savings and debt.

Another good idea is to build an emergency fund to cover at least six months’ worth of expenses in case you lose your job or have some sort of financial emergency. If you spend too much money on your debit and credit cards, you could disconnect your cards from e-commerce sites and use cash as much as possible.

Work with an Experienced Auburn, AL Divorce Attorney

Because of the adverse financial effects of a divorce, you will need a lawyer who has extensive legal experience and is committed to advocating forcefully for your best interests. In Auburn, Opelika, and the surrounding communities, get in touch with Alsobrook Law Group today for assistance. Message us online or call our office at 334.737.3718 to schedule a free consultation. We look forward to serving you!