Divorce: A Luxury You Might Not Be Able to Afford

05.01.2017 • The Economy

Selva Freigedo Gowdie Family Wealth (AUS)

My friend, a successful businessman, and his wife decided to divorce after 15 years of marriage.

They kept their separation amicable for the sake of their two children. Yet my friend’s desire to maintain the same living standards for two separate households took a toll on their finances.

Unfortunately, they were living in Spain, during the worst financial crisis the country had ever endured.

The dream home they had purchased during the property bubble had decreased in value by 45%.

Business had slowed.

In addition to relying on his wife’s income to afford the mortgage payments, my friend could only sell the property at a loss. The mortgage payments had become a burden.

Soon it became clear they could not afford basic necessities for both households if they were to keep their children in private school.

The truth is, they couldn’t afford a divorce while keeping their standard of living intact.

And they were not alone.

During that time, the fall in property prices and the rise in unemployment made many couples rethink their divorce plans due to their financial obligations. The phrase ‘I would divorce if I could’ became common.

As the following graph shows, the number of divorces in Spain (green line) dropped during the financial crisis.
Source: Spain’s National Statistical Institute (INE)
Click to enlarge

The graph shows a drastic change from 2005, when divorces had become commonplace.

Before 2005, divorces were lengthy processes. They required at least a two-year separation and a valid reason — like infidelity or alcoholism.

Trying to relieve the divorce court backlog, the government passed the ‘divorce express’ law. Divorces became a three month no-questions-asked affair.

Yet by 2009, divorces had dropped 27% since the 2006 high. Couples were waiting out the recession, as they couldn’t afford the increased expenses.

In Australia, 35% of marriages are likely to end in divorce. Half of those divorces involve children.

Divorce can be a painful and emotional experience, but it can also have a devastating financial impact. And at an emotional time, finances can take a low priority.

According to a NATSEM (National Centre for Social and Economic Modelling) report titled ‘For Richer, For Poorer: Divorce in Australia’, it can take a minimum of five years to recover your initial financial position following a divorce.

A divorce can decimate your savings, your assets and your superannuation. It can also threaten your ability to get back into home ownership and give your children the education you want.

The wealth accumulated during the marriage will have to be split between the two spouses. In addition to that, any existing income strategies must now sustain two households, or be altered to cater for the new arrangement.

It is not surprising, then, that living standards take a hit during and after a divorce. According to Utah State University research, individuals divorcing would need more than a 30% increase in income, on average, to maintain the same standard of living they had before the divorce.

For Australians, divorce usually happens later in life. The median is 45.3 years for men and 42.7 for women. Smack bang in the middle of raising kids and the prime years of wealth accumulation.

Women are usually the most affected. This is mostly due to the fact that children tend to stay with the mother after the divorce, as well as the gender pay gap.

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