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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.
Standing at the altar, nobody thinks they’ll be sitting in a divorce lawyer’s office one day, yet that’s the reality for millions of Canadians each year, and managing the resulting financial hellscape is likely near the top of a divorced couple’s stress list.
“There’s a lot of divorce happening, 2.74 million people applied for divorce in Canada in 2021, 1.88 million in 2020,” Jeanette Power, senior wealth adviser at the Canadian Imperial Bank of Commerce, said. “Divorce is all around us. Everyone goes into relationships hoping for the best, but you do really need to prepare for it.”
Canadians also now have the additional strains of worrying about inflation and rising interest rates when going through a divorce. Never mind the pressure from real estate investments. Yet, according to a recent Love & Money survey by Toronto-Dominion Bank, it may not be all bad news.
“After a couple becomes divorced and are a single-income household, more than half, at 54 per cent of respondents, said it’s easier to manage their finances than it was prior to the divorce,” Michael Nitz, district vice-president at TD Canada Trust, said.
But getting to that point is the hard part. That’s why both Nitz and Power recommend meeting with a professional financial adviser as one of your first steps when going through a divorce.
“Canadians going through divorce need a team of professionals around them. They need their emotional support team, and their financial support team,” Power said. “If they have a good team around them and that team can provide checklists, education, webinars in some cases or refer a client to different applications, that’s a good start.”
Professionals will also inform you about some of the upfront costs associated with a divorce. An uncontested divorce costs an average of $1,860 in Canada, according to the 2021 Canadian Lawyer Legal Fees Survey. That jumps significantly to $20,625 for a contested divorce.
Canadians going through divorce need a team of professionals around them
“If taken to court, it could be over $50,000, depending on the complexity,” Power said. “I have clients who are still dealing with divorce through the courts and it’s three or four years later.”
There are also costs that need to be managed right away. For example, if there are children involved, you may have to pay child support. But two separate homes mean two computers, two internet services, and so on. These everyday costs add up, which is why getting your finances in order and creating a budget and personal financial goals with your adviser are a few good first steps.
“There’s a difference between what you need and what you want,” Power said. “So often when we’re budgeting, we have to remind clients that those are two different things.”
In many cases, real estate becomes the largest asset for people going through a divorce. It usually has the largest emotional attachment, too. But again, people need to figure out what they need, and what they can afford.
“Housing and where they live is usually the highest expense, so it’s important Canadians don’t spend beyond their means,” Nitz said. “We suggest you find the best mortgage solution as typically your income is reduced, so finding a mortgage solution that will support clients in their new way of living is important.”
But if you’re able to come to an agreement, Power suggests holding off on the sale of your home. The Canadian Real Estate Association recently reported a 12.6 per cent decline in national home sales on a month-to-month basis. Until the market stabilizes, it could be a good idea to address this large decision down the road when both former partners have their finances in order.
“Maintain the property even for six months until they can get their heads in a space where they can start downsizing and moving,” she said. “It’s easy to sit there and say you need to sell the house. Emotionally, it’s a completely different conversation.”
Once you’ve dealt with these costs and have a budget underway, it’s time to rebuild. That means building up your own credit without your partner. And this can be quite a different experience depending on the age you get divorced.
Power said there has been an increase in “grey divorces,” couples who have been together for 20 years or more. In this case, their credit history has usually been built together, making it difficult for the newly single to even apply for a mortgage for a new home.
“In a lot of the grey divorces, the credit cards or loans were always in joint, but not always individual where they don’t have their own credit established,” she said.
For younger people going through divorce, Nitz said the Love & Money survey noticed a shift away from this joint-financial thinking. But other issues have come up.
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In the survey, 49 per cent of Canadians under 40 said they didn’t have a joint account with their spouse, and 63 per cent said they didn’t have shared credit cards. Furthermore, this generation was less tolerant of “red flag financial behaviours,” Nitz said, with 81 per cent saying they would be concerned if a potential partner was secretive about finances.
“Typically, millennials keep their banking more separate,” he said. “About 60 per cent of Canadians say it’s harder to find true love than financial success. We hope it’s easier to find financial success because they’ve met with an adviser.”
That doesn’t mean future relationships are set up for failure. Both Nitz and Power said couples should meet with professional advisers together as often as they can. This allows for better communication and transparency, creating a more open and honest relationship.
After the emotional stress and financial strain of divorce is under control, people say they have become more financially stable. About 57 per cent said they spend less and are more in tune with their budget, according to the Love & Money survey.
“Nobody knows what’s going to happen. Marriage is expensive, but divorce is even more so,” Power said. “If the time comes, you want to be prepared. You don’t want to make decisions based on emotions.”