We Are Here
To Serve You
photo of attorneys Brown and Ahmed
  1. Home
  2.  » 
  3. Cost of Divorce
  4.  » The Top 10 Financial Mistakes To Avoid During Divorce

The Top 10 Financial Mistakes To Avoid During Divorce

On Behalf of | Jun 26, 2012 | Cost of Divorce

Here is an article from Nolo which addresses financial mistakes to avoid in divorce. There are many such lists but I find this one particularly useful. Divorce can cause stress and anxiety and research has shown that stress and anxiety can seriously affect one’s judgment, even if normally financially astute. Before taking any financial actions while considering divorce, consult with your attorney. Your emotions many have already clouded your financial judgment.  Contact us with questions


The Top 10 Financial Mistakes to Avoid During Divorce

Divorce requires you to make financial decisions at every turn. Avoid some of the most common mistakes.There are many financial decisions to be made during a divorce, many of which can affect your financial security well into the future. It’s crucial that you get good financial advice, and avoid making some of the mistakes that financial professionals identify as the most common.

1. Not knowing how much it costs you to live. Most people know how much they earn each month, but are less aware of where their money goes-in fact, we usually tend to underestimate our expenses significantly. Take the time to write down everything you spend, from parking meters to new shoes, and develop a realistic monthly budget.

2. Assuming that the custodial parent should keep the house. This issue is closely tied to the budget question. It’s often a very emotional decision whether to keep the family home, especially when the kids are still living at home. But no matter how attached you are to your home, it’s critical to have a realistic sense of whether you can afford it. If you give up everything else in order to keep it, and then find you can’t afford it, you’ll be in a real financial bind. Learn more here.

3. Believing that an equal division of property is the same as a fair division of property. Not all assets are created equal, so having each spouse receive property of equal monetary value doesn’t always mean each spouse walks away with a truly equal share. For example, assets that generate income may be worth more than their market value, and tax issues may also factor in. Make sure you are comparing apples to apples when you trade assets in a divorce negotiation, and pay attention to tax basis, present value, and transaction costs, even those that might be far in the future. There’s a great deal to know about this issue; see Divorce & Money, by Violet Woodhouse with Dale Fetherling, for much more information.

4. Deciding financial issues one at a time instead of understanding how they affect each other. By looking at each asset or source of income separately, you miss the interaction of taxes, capital gains, investment losses, timing issues, inflation, and more. A fair settlement begins by looking at a comprehensive picture of your finances and then determining suitable courses of action.

5. Not insuring alimony and child support. Your ability to collect alimony and child support is only as good as your ex-spouse’s ability to pay. You can use disability and life insurance policies to ensure the payments will continue even if your spouse is unable to make them.

6. Not understanding unsecured debt. Unsecured debt, for most people, means consumer credit card debt. In most cases, if you incurred the debt during the marriage, it’s a shared liability no matter which spouse used the credit card. When you settle your divorce, you’ll divide responsibility for those debts-but don’t make the mistake of thinking the credit card companies care what your settlement says. They can still come after both of you for payment. The best practice is to pay off all the debts before the divorce becomes final, if possible.

7. Not evaluating the defined benefit pension plan correctly. A defined benefit plan means a true pension plan, one that the employee was required to pay into and that the company also funded. (It’s different from a defined contribution plan such as a 401(k).) The defined benefit plan pays a monthly income at retirement, and is under the control of the employer. Even though a defined benefit plan won’t start paying monthly income until the employee retires, that plan does have value today, and the non-employee spouse is entitled to a share of that present value. You need an actuary to make those calculations in most cases-and it’s worth spending the money to get an accurate valuation, which will allow you to work toward a fair settlement.

8. Not following through with a Qualified Domestic Relations Order (QDRO). The Qualified Domestic Relations Order (QDRO) is a legal document that sets out the details of the pension division and orders the plan administrator to pay part of the pension to the non-employee spouse. Even though it may be many years before the pension is payable, it’s crucial that you get the QDRO in place as part of the divorce, or you may lose important pension rights.

9. Using unrealistic assumptions about inflation and investment returns. If your future ex-spouse is trying to convince you to settle for a certain investment because “it’s going to grow at 30% per year,” you might want to get a professional opinion. That great investment may not be so great. Likewise, be realistic about your future living expenses. Not taking inflation into account will grossly underestimate your future needs. You could find yourself in a situation where your quality of life drops year after year.

10. Failing to ask, “How do I know that I will be financially secure after my divorce?” before signing the divorce papers. If you look only at the immediate task of splitting assets and obtaining alimony and child support, without understanding how things might look in five, 10, or 20 years, you are doing yourself a great disservice. Planning for the future is the key; if you’re not good at that, hire a financial planner and get some help. You need to focus not only on your immediate and short-term needs, but your long-term financial security. Remember, once the papers are signed, the settlement is done and you’re on your own.

Source: www.nolo.com