The Devastating Economics of Divorce

April 16, 2002 -- Lisa Bell knows the financial struggle of divorce all too well.

Bell, a 35-year-old public relations consultant in Boulder, Colo., decided to sell her half of the three-year old public relations firm she had started so that she could stay home to take care of her 4-year-old son and devote more time to her struggling marriage.

Unfortunately, her sacrifice was in vain. Three months after selling out to her business partner, she and her husband decided to divorce. Even though they divided their assets equally, Bell has had to start all over in her career, working from home as an independent consultant.

She now earns half of what she used to make in her old business, and has had to get used to living on a quarter of the income she enjoyed while she was married. She's also living with her son in the couple's old house, which she has been trying to sell since July.

"It's become an albatross now," Bell says of her home. "It's a house filled with adult toys that are a representation of all of the money we accumulated in the marriage. It's full of stuff that I can't sell and I don't want anymore."

Harsh Reality for Some

When divorce hits the headlines it's usually those of the rich and powerful — like the recent splits of Jack Welch of General Electric or Sen. Jon Corzine of New Jersey — prompting court watchers to scrutinize how these by power brokers and their ex-wives divvy up their fortunes.

But for people like Lisa Bell, mere mortals who don't have millions at their disposal, divorce can be the one of the most financially devastating events they will ever face.

This is especially true for women, who are more likely than men to find themselves with financial difficulties after getting separated or divorced. According to the latest U.S. Census figures, 21 percent of recently divorced women were living below the poverty line, compared to only 9 percent of recently divorced men.

How marital property gets distributed during a divorce differs from state to state. Most adhere to what is called an equitable distribution system, where a court divvys up the marital estate based on a number of factors, such a person's need or earning power.

A small minority of nine states have community property rules, where marriage is considered a partnership and any property or assets acquired during the marriage are divided equally. Many see community property rules as a way to insure an equitable divorce.

Divorce Dollars: A State-by-State Guide

But the harsh reality is that even in these community property states, the lower wage earner usually suffers the most financially.

That's because the spouse who earns more or has been able to keep their job maintains their earning power year after year. The spouse who decided to bow out of the workforce to maintain the home or family has to start from scratch in the working world, typically earning less.

And though some women are making more money than their husbands these days, in most cases, the lower wage earner is often still the wife.

"Most families are in a situation where they need the two incomes to maintain their lifestyle," says Myra Strober, labor economist and professor of education at Stanford University. "Now they're going to lose all of the economies of scale that couples have."

Separate, But Not Equal

The plight of non-working spouses made big news in 1997 when Lorna Wendt, the ex-wife of former GE Capital chief executive Gary Wendt, contested her husband's offer to give her 10 percent of his assets, or around $11 million, at the end of their 32-year marriage.

Wendt argued that even though she did not work, her role in the couple's marriage was one of an equal partner. She ultimately got $20 million, or half of her husband's hard assets. She later launched a campaign to get that figure increased to $35 million based on the value of her ex-husband's stock options and pension, but dropped her appeal last year after reaching a confidential agreement.

Wendt's case took place in Connecticut, a state with equitable distribution rules. But experts say not even community property concepts are a panacea. Many couples are still left with lingering financial problems ranging anywhere from planning for their retirement to simply learning how to live on less.

While there are no easy answers to the devastating economic impact of divorce, many say discussing finances before getting married, and even drawing up some sort of a pre-nuptial agreement or contract, might be the best way to prepare for the possibility of divorce.

Wendt, for one, is now a crusader for promoting equal partnerships in marriage, founding The Institute for Equality in Marriage. The New York-based non-profit organization provides information and resources to help couples set up equal legal and financial partnerships before, during or after marriage.

"It's a matter of respect and trust and realistically being able to sit down and say, 'We are legally sealing our union, now let's be smart enough to talk about what that means,'" says Courtney Knowles, vice president of communication for the institute. "People have to take charge even before their marriage gets rocky and discuss, how do we value each other?"

Men's Problem Too

A whole new profession has sprung up from this marital uncertainty — the certified divorce planner. The profession has gained popularity over the past few years as a way for people to evaluate to financial impact of a divorce, something a lawyer may not do.

Natalie Nelson, a financial divorce consultant in Boulder who worked with Lisa Bell, says she outlines exactly how long the proceeds from a potential settlement will last clients so that they can make suitable decisions about their futures. She doesn't make investment recommendations, but refers clients to others if they need services like investment or insurance planning.

Nelson, who works with both individuals and couples, recently showed one woman going through mediation how a half million dollar settlement wouldn't last her until retirement — even on a tight budget.

"I'm not looking just at the snapshot of the divorce itself but projecting many years into the future to let them know what the outcome of their settlement is going to look like for them," she says.

Both Knowles and Nelson note that it's not just women who are seeking out help. Around 40 percent of the institute's Web site's readership is from men, and Nelson says she's had a number of male clients who are coping with how to deal with finances after a divorce.

Says Nelson, "I wonder sometimes if people knew what divorce was going to cost them if they would try at all costs to avoid that outcome."