When Jessica decided to part ways with her husband Alan after 14 years of marriage and two adorable kids, she thought the court granting them the divorce would be the final step to this emotionally taxing phase of her life. However, right after filing for divorce, the realization that her personal finances were going to take a big hit made her pause and think of solutions to her impending financial troubles. Because divorce meant a division of assets and debts between the spouses, which was sure to impact their lifestyle, financial security, and retirement choices.
Realizing she would need help understanding these financial implications, Jessica approached a professional financial advisor who could help her restructure her finances to the post-divorce reality. Here’s what she learned from her advisor about the impact a divorce, or separation between common-law couples, can have on personal finances.
What Happens to Your Assets After Divorce
The first thing that happens after a divorce is that the value of “net family property” (NFP) is calculated and divided equally between both spouses. The NFP includes all assets acquired while married, including real estate, minus debt accumulated during the marriage. The asset and debt splitting rules may vary from province to province, so make a note of them too.
In Jessica’s case, she also owned a house before marriage, which her advisor said she would continue to own even after the divorce. However, the value of that house increased in her 14 years of marriage, and Jessica was liable to equally split this appreciation with Alan.
Apart from that, she would also have to equally split the value of their holiday cottage, furniture, car, and the small side business they had started during the pandemic. Every asset, retirement savings, and investment accumulated during marriage had to be split, including their Registered Retirement Savings Plans (RRSP), Tax-free Savings Accounts (TFSA), Canada Pension Plan, and Guaranteed Income Supplement.
The only exclusion to this 50-50 split is if either person has received property in inheritance during the marriage.
What Happens to Your Debt
Not just assets, any joint debts taken to acquire or maintain these assets would also have to be divided equally. A divorce converts a dual-income household to a single-income one, leaving the divorced couple with half the financial means to pay off equal amounts of debt. This is particularly difficult when the couple has accumulated large amounts of mortgage, loans, or credit card debt.
However, there are some exceptions to this rule, especially if debt is due to reckless behaviour like gambling or addiction of one partner or has been deliberately taken on by a partner with the intention of depleting the net family property.
In Jessica’s case, she entered the marriage with $250,000 in assets, and Alan entered with $200,000. They had no debt at that time. At the time of divorce,
- Jessica had $500,000 in assets and $100,000 in debt = net assets of $400,000.
- Alan had $600,000 in assets and $200,000 in debt = net assets of $400,000.
They will deduct what they brought into the marriage from their net asset:
Jessica’s NFP: $400,000 – $250,000 = $150,000
Alan’s NFP: $400,000 – $200,000 = $200,000
Since Alan has a higher NFP, he will split the $50,000 surplus equally by giving $25,000 to Jessica.
Salvaging Your Personal Finance After a Divorce
Looking for a way out of your financial burden while coping with the emotional strain of a divorce is not easy. Hence, consulting a trusted financial advisor to guide you through the process is a great idea. But till you find such an advisor, there are some steps you can take to avoid further damage to your personal finances.
The first is to immediately separate your finances, including your bank account, from those of your spouse. Next, freeze any joint credit cards or joint lines of credit. These steps can help ensure your debts don’t mount and add to your stress.
Adjusting Household Budget
Earlier, you split the house expenses with your spouse. Now, you have to cover all expenses and debt on your single income, which will require significant adjustments to the household budget. Moreover, if you have been filing taxes jointly, you will now have to file taxes separately. Your government benefits, such as Canada Child Support, will also change as these benefits are calculated depending on your household income and marital status. You will have to incorporate these changes into your household budget and focus on building an emergency fund.
Keep or Sell Your Home
A divorcing couple can either sell their home and share the proceeds equally or agree to let one spouse stay in the home and buy out the other’s share. While the first scenario sounds more logical, buying another house with just half the actual value of the house is no easy task, especially in times of rising real estate prices. You might have to settle for a small house in a more affordable neighbourhood for a while.
It is also challenging to maintain the house in the second scenario with only your income. Or, if you continue staying in the house, it might be a good idea to rent it out for some time till your finances stabilize.
Insurance Coverage
If you have been enjoying your spouse’s healthcare coverage, you will have to purchase your own individual healthcare insurance post-divorce. You might also consider increasing your coverage to take care of your kids or dependents in case of unforeseen events. A divorced person staying alone should also consider disability or critical illness insurance. A financial advisor can guide you on a plan that suits your current financial position, as well as your future needs, helping you make a better decision.
Estate Plan
Another very important step is revising documents such as your will or power of attorney to incorporate changes in your familial and financial situation after divorce. If you have named your spouse as the beneficiary on any life insurance policies or investments, have them updated as soon as possible.
Investments and Financial Goals
Getting your finances back on track after a divorce takes time. But once they’re stabilized, it’s important to update your financial goals to align with your new financial situation. This includes planning for short-term goals, such as clearing any debt or saving for your children’s education, and long-term goals such as retirement planning for yourself. Your financial advisor can be a huge asset to help you make informed investment decisions to achieve these goals.
While her divorce certainly does not define Jessica’s life, it did act as a temporary roadblock to her financial goals and needs. However, smart saving strategies, effective investments, and supplementary income through a part-time job at the local library enabled Jessica to get back on her own feet. With an advisor by your side, you too can plan the journey from post-divorce financial instability to financial freedom over time.
Contact Black and Gill LLP in Toronto to Help You Manage Your Personal Finance
Work with a trained advisor to help you cope with the drastic changes in your finances post-divorce. At Black and Gill LLP, our accountants and advisors provide services such as tax filing, investment and retirement planning, and debt management. To learn more about how Black and Gill LLP can provide you with the best accounting and financial advisory services, contact us online or call us at 416-477-7681.