No safety net’: How a divorce rips a tornado through your finances, and what to do about it
Danielle Kubes, Special to Financial Post | February 19, 2016 12:04 PM ET
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Whatever else you may think of divorce, or marriage for that matter, we can all agree on that.
In fact, I looked up the word “trauma” in the Oxford American’s Writer’s Thesaurus while writing this article. To my delight: “Trauma, noun, 1. The trauma of divorce.” There you go. Divorce is known as so universally crappy that it’s used as the example for a word whose synonyms include “torture” and “war-weariness.”
Reaching beyond the obvious emotional implications though, a major consequence of divorce is the absolute tornado it rips through your finances.
Few couples realize that no matter how conscious the uncoupling, no matter how determined they are to dissolve their marriage congenially, their finances are likely to be, if not decimated, then at minimum thrown into disarray.
“I really don’t know if there’s a watershed mark when people look at this thing and say ‘I have no money left’,” says Donald Baker, a family law specialist at the Toronto firm Baker and Baker.
“During the divorce what happens normally is that they don’t even think of the financial ramifications because, you have to remember when they go through this process, it’s an incredibly emotional process. Even a so-called simple divorce … they aren’t really thinking that clear.”
That is, until they are confronted with the raw numbers.
To determine asset split and spousal support, Canadians must fill out a financial statement, which is a document of about 15 pages detailing income, expenses and assets.
“This is sort of the first point in the process for people who are saying, ‘I didn’t realize it costs me this much to live,’ and it usually comes as a bit of a shock for most people,” Baker says.
Greg, who asked not to use his real name, is 48, works in sales and had two sons with his wife of 15 years. They divorced last January in what he describes as “amicable” circumstances.
“Almost no one talks about how you’re going to manage your finances when you’re separated before you actually go out and educate yourself at that time,” he says. “And you’re dealing with a short window of time to bring yourself up to speed…. You’re not an expert and you’re learning things that surprise you.”
How to make the financial side of divorce less horrible
1. Sign a Marriage Agreement
Commonly called a prenup, creating a Marriage Agreement before your wedding will allow you to tabulate your assets before marriage. If you ever divorce, says Baker, you’ll be able to prove that you did indeed have savings of $30,000, for example, before entering the marriage, which will then likely be entirely yours to keep.
2. Consider going through a mediator
If your divorce is amicable, you may be able to save money by going through a mediator instead of hiring two lawyers. Greg says he wishes he and his wife went to a mediator first “given we were so close,” and because they were so “surprised at how quickly the (lawyer) fees added up.”
3. Recognize divorce law is not what you see on TV
Canada has totally different divorce laws than the U.S., and trying to get tips from your favourite lawyer show won’t help you at all. For example, behaviour has zero effect on how much money you’ll walk away with. The division of assets is a purely mathematical calculation.
4. Know your expenses
Ultimately, the divorce process is likely to catch you off-guard and throw you into the ocean where you’ll be gasping for air. The only real way you can prepare for your post-divorce financial situation is to know what you’re spending now. By tracking your expenses, you can figure out where you can cut back once you’re on a single income and you’ll feel much more confident taking a firm grasp on your expenditures.
The biggest surprises for Greg were not the obvious hefty expenditures, like child and spousal support, but the smaller legal and administrative costs.
For example, both Greg and his ex-wife had to take on critical illness insurance.
“There’s no fall back. Even in a situation where two people are married and one is stay-at-home, that situation can be changed and that other person can go back to work,” he says. “I don’t have that option (now).”
They also spent thousands on legal fees.
The cost of an uncontested divorce ranges from $1,000 to $3,500, according to 2015 Canadian Lawyer’s legal fees survey, but you also have to consider the cost of things like making a new will (another $430 to $750).
“I was still surprised, despite how amicable (we were) … how expensive the legal system was to navigate through,” Greg says. “And we did as much as possible ourselves in terms of the paperwork.”
Baker says that the court’s main fiscal aim is to ensure both parties “leave the marriage as equal partners.”
That means all property is generally split 50/50 and the spouse with the higher income pays the spouse with the lower income an equalization amount so that one party doesn’t experience a huge drop in his or her standard of living. (Any assets, besides the marital home, that you can prove you brought into the marriage you usually get to keep.)
But no matter how careful a couple is, there are almost always expenses that don’t make it into the calculations.
For example, Greg was required to split his pension plan with his ex-wife. Although he found the concept of the division fair, what really irritated him was that the pension plan administrators charged $800 just to find out the present value of the fund — a fee he was responsible for paying in full, since it was his asset, even though both parties would benefit.
He also got his taxes reassessed this year because he and his wife agreed to split the Child Tax Benefit, which seemed fair to them since they share custody. But the CRA told him the party receiving any kind of support is the one that can claim the entire tax credit.
“I still don’t understand why the system is set that way. It’s hard to comprehend where the equality is,” he says. “As far as I know we’re trying to set up each household with roughly equal income, so we naturally assumed that (credit) would be split as well.”
Ultimately, whichever way you split it, running two households is simply more expensive.
“It’s like single people,” Baker says. “You have two separate lives financially. Instead of paying one rent or one mortgage payment you have two of them. Those are after-tax dollars, so that’s pretty painful financially.”
Greg dealt with this by going through his budget line-by-line. Luckily, he was fiscally aware enough to know what he was spending and managed to trim his expenses by about $300 a month.
“The biggest thing I recommend everyone to do is go through your expenses twice,” he says. “Once to eliminate what you don’t need and, for the things you want, ask how you can get that stuff as low as possible.”
Even if you can cut back a bit, having higher overall expenditures means that saving for retirement often gets put on the back burner after a divorce.
Greg and his ex-wife used to put money in their RRSPs, but there’s simply not enough cash to go around right now.
“I’m not making progress on building security for myself and a buffer,” Greg says. “It’s a very thin line for me and I would be in a situation, if I were to lose my job, I would almost inevitably have to put up the house for sale immediately.”
Despite their experience on either side of the issue, neither Greg nor Baker can see any real way to prepare yourself for a divorce.
I don’t have a safety net and neither does she
Baker does suggest that people draw up a Marriage Agreement, sometimes called a pre-nuptial agreement, before they wed: Taking inventory of any assets you have before exchanging vows makes it easier to deduct them from your calculations upon dissolution.
Greg suggests taking a more practical and serious view of marriage and divorce.
“I believe in love and romance and marriage and all that stuff,” he says. “The only thing I’ve changed slightly is that I believe both parties should receive independent legal advice before they get married. That does need to be considered because you are essentially asked to sign a financial document without representation. It’s a legal document.”
It’s true that part of the reason divorce catches us so off-guard is because it’s a reminder of what we’re dissolving: not just an affair of the heart, but a covenant between two parties who once agreed to combine and share assets within a conjugal relationship.
“This is really permanent,” Greg says. “I don’t have a safety net and neither does she.”
Illustrations by Chloe Cushman/National Post