Understanding the Financial Consequences of Divorce

Marriage is just as much a financial relationship as it is an emotional one. Importantly, the financial consequences of divorce are far reaching and go beyond the question of who gets the house and other marital property in Maryland. In fact, the economic implications of divorce can impact you for years to come. It’s essential to have a solid understanding of your financial situation if you’ve decided to part ways with your spouse in order to make informed decisions and safeguard your assets.

Division of Marital Property

Whatever property or assets one spouse acquires during the course of a marriage, regardless of title, is considered marital property in Maryland and belongs to both spouses. Under the state’s equitable distribution laws, marital property must be divided fairly when a couple parts ways. Dividing marital assets is a significant financial consequence of divorce — especially for spouses who have been married for a lengthy period of time. In a long-term marriage, spouses may acquire substantial property that must be divided, including real estate, bank and retirement accounts, vehicles, furnishings, business interests, and investments.

Debt Allocation

Just as marital property in Maryland must be divided, debts — such as mortgages, car loans, and credit card debt — must also be considered when marital property is divided. Most debts are contractual in nature, for example: a mortgage, a car loan, or credit card debt. If the Court is transferring a house or awards a car to one party or the other, the Court will transfer these assets with consideration given to the underlying debt. This will often require that the spouse receiving the asset be required to refinance or otherwise assume sole liability for the underlying debt. If unsecured marital property has a debt (for example: a TV, a computer, or something else that is financed), the Court will often transfer that property to the person that remains responsible for the debt. Alternatively, if the debt is owed on a joint credit card, the Court will consider the remaining liability as part of the overall “equitable” distribution of marital assets. The Court will not reallocate a joint credit card debt, and generally speaking the Court cannot reallocate individual credit card debt. However, that debt will be considered and the Court will endeavor to fashion an equitable distribution of marital property.

Division of Retirement Assets

Retirement funds that were accumulated during the marriage are classified as marital property and subject to division when spouses part ways, even when those assets are only titled in one party’s name. This can have a major impact on a spouse’s financial security and standard of living after divorce. There may also be early withdrawal penalties and other tax implications when it comes to transferring retirement assets, if the transfers are not addressed at the appropriate time and in a tax-advantageous manner. In some cases, a spouse might have to postpone retirement if a significant portion of his or her retirement account is allocated to the other during divorce proceedings.

Impact on Your Credit Score

Although divorce itself doesn’t impact your credit score directly, there may be other aspects of your divorce that will affect your credit report. Notably, the impact of divorce on your credit score has to do with how your finances are handled during and after the divorce process. For example, if you share any joint liability accounts with your spouse and a payment is missed, you may see a decrease in your individual score. Ideally, you should establish separate accounts and work together to divide, transfer and/or close joint credit cards depending upon your individual circumstances. You may also want to remove your spouse as an authorized user on any individual credit cards that remain, or establish spending caps to ensure that unauthorized charges are not assessed. Regularly review your credit reports to identify whether there are any issues or unauthorized activity.

Increased Living Expenses

Going from a household supported by two incomes to a single-income household after divorce can be financially challenging. Often it is helpful to create a post-divorce budget to account for new and often increased costs for mortgage or rent payments, utilities, groceries, and childcare. It can also be helpful to track your expenses to see where you might be able to cut back and make adjustments to old routines. Your attorney may be able to work together with a financial advisor to assist with the development of a new financial plan to ensure you manage your finances effectively during the divorce process and after.

Tax Implications

There are many tax consequences in divorce that may result from the division of marital property, transfer of assets, and sale of real estate. For divorces finalized after January 1, 2019, alimony payments are no longer tax deductible for the paying spouse and the recipient receives the payments tax-free. Child support payments are not tax deductible by either the payor or the recipient, though there may be tax credits or benefits that stem from child-related expenses and custody.

Loss of Health Care Coverage

For many spouses, one of the biggest financial consequences of divorce has to do with health care coverage. If you were on your spouse’s health insurance, you will lose your coverage once your divorce is finalized. While you might be eligible for COBRA insurance, this can be costly — and it only lasts for 36 months. You may need to explore other options, such as obtaining health benefits through your own employer or the Affordable Care Act marketplace.

Attorney Fees and Court Costs

Attorney fees and court costs can quickly add up in a litigated divorce. However, it’s important to understand that methods of alternative dispute resolution such as mediation or collaborative divorce can lessen the amount of time it takes to divorce — and reduce the overall costs associated with the process. Mediation and collaborative are both non-adversarial and may make it possible avoid lengthy court proceedings. These out-of-court process options encourage spouses to work together to reach an divorce agreement amicably, peacefully, and respectfully.

Contact an Experienced Maryland Divorce Attorney

If you are parting ways with your spouse or have questions concerning the division of marital property in Maryland, it’s vital to have a knowledgeable divorce attorney who can explain the financial consequences of divorce. At the Law Office of Shelly M. Ingram, our Fulton, Maryland divorce attorneys are dedicated to providing our clients with trusted legal services for a wide variety of divorce and family law matters. Trained in collaborative divorce, mediation, and traditional divorce litigation strategies, we work closely with our clients to achieve positive results in every case.

To schedule a confidential consultation with an experienced Maple Lawn divorce attorney, call us at (301) 658-7354 or contact us online.