When couples contemplate the divorce process, without question, there are many issues that may seem intimidating to tackle. Certainly, highest among them are issues involving children, if the divorcing couple has them. But following closely behind are many issues involving finances. Many married couples make the decision to comingle funds and budget together during a marriage. For the most part, these are wise and sound marital practices, but when couples find themselves facing the prospect of divorce, it can seem daunting to begin the process of untangling all of your combined assets and funds.
Addressing these issues properly will require an in-depth review of all of your assets, debts, income and expenses, and will require a considerable amount of time and attention. Unfortunately, people often make the mistake of underestimating the complexity of these issues and the importance of dedicating the necessary time and attention to them.
With that in mind, we have created a list of the most common financial missteps and mistakes that couples make when divorcing, along with tips on how you might be able to avoid similar difficulties. Certainly, though we intend for this list to be thorough, it is no replacement for legal advice regarding your personal circumstances and situation. As you begin the divorce process, there is no substitute for the advice of a qualified and experienced attorney and perhaps a financial professional as well, depending upon your particular situation.
With that in mind, here are some of the most common financial mistakes to avoid during the divorce process:
- Being unaware of the state of your marital finances: Stated quite simply, it can be very difficult to reach a fair and equitable financial resolution to your divorce if you do not truly have an accurate understanding of your financial situation. Getting a full and comprehensive picture of your finances will require carefully reviewing all of your income and expenses, as well as all of your assets and debts. This should include a review of any bank accounts, investments, retirement and pension accounts, money market accounts, valuable personal property, and any other type of asset or debt that you may share as a couple. In addition, it will be important to identify any separate property that you brought into the marriage that belongs only to you. If your soon to be ex-spouse was in charge of managing the budget and you were not involved in the process, this may understandably seem daunting. Nevertheless, it is important to begin obtaining this information and to take it one step at a time. Be thorough. Don’t hesitate to ask for all documentation of your finances because you are entitled to that information. If you suspect that your ex is hiding assets or otherwise lying about your financial situation to avoid having to divide the property with you, you should bring this up to your attorney as soon as possible. Not only is this type of behavior illegal – it could also significantly impact other aspects of the divorce process as well.
- Failing to create a realistic budget: Despite the fact that there are many budget apps out there and despite the fact that creating a budget is often recommended, many people simply never get around to truly creating a budget that accurately reflects their spending habits in comparison to their income. As you prepare for divorce however, creating an accurate budget that realistically reflects what you spend each month will be very important. Most divorced couples go from paying for one mortgage and one set of utility and associated household bills to two. As a result, it is very important to be able to create a reasonable budget that factors in an accurate assessment of your living expenses and which will help you to plan for this next phase of your life. This is not to mention the fact that your budget will become a baseline for other parts of the divorce process, like calculating alimony and support for example. For these reasons, it is well worth it to take your time and thoroughly include all of your monthly expenses and income into a budget. If budgeting is not your thing that’s okay – there are many financial professionals out there who can assist you with this process and help you to ensure that your budget is complete and accurate and will serve you well as you prepare for your next chapter.
- Failing to put aside enough cash in a separate account to get yourself through the divorce process: In North Carolina as in many other states, couples cannot simply make the decision to divorce and have a process completed within a month or so. Indeed, in North Carolina, a one year period of legal separation is required prior to the time that parties can file for divorce. As a result, it is important to make sufficient financial plans for covering your expenses between the date of separation and the time it takes to settle the issues between you in a divorce. You do not want to find yourself in a state of financial uncertainty for what could potentially be many months. If you have any concerns whatsoever that your spouse may try to shut off your access to funds or otherwise make life financially difficult for you during the separation and divorce process, it can be wise to put money away now in an account for yourself during the divorce process. A rainy day fund of this nature can serve as a safety net and a cushion during difficult times. It is worth noting however that you do not want to keep this fund a secret. Lying about your assets, or hiding money in anyway cannot only cause tension between yourself and your spouse during a time that you will need to work together cooperatively toward resolving your issues – it would also be frowned upon by a court and could negatively impact you with respect to other divorce issues as well.
- Making the assumption that an “equal” division is “fair”: During the divorce process, many people make the assumption that taking an asset and dividing it “equally“ down the middle is the most fair and reasonable thing to do. In some cases, this is correct, but in many cases, it is important to remember that the value of an asset is not necessarily limited to or defined by its current market value. Some assets – for example, bonds or rental property may be worth more than their current “market“ value. Instead of dividing property based only on its current monetary value, try to consider the estimated value of the assets overtime as you attempt to decide how to split them evenly between yourself and your spouse.
- Being unaware of your spouse’s work benefits or stock investments: It is not at all uncommon in a marriage for one spouse to take primary responsibility for tracking and handling financial matters. While this is not unusual, as you begin the divorce process it can become problematic, not only from a general standpoint, but also when it comes to ensuring that you are aware of specific assets that you may be entitled to. Often, one spouse may have certain work benefits, stock options, or investments associated with their job that the other spouse is either unaware of, or is only aware of in the most general sense. What you should know, however, is that when you divorce, you are entitled to a share of your spouse’s employer-funded pension or retirement accounts even if the payment is not scheduled to occur until the employee spouse retires. As a result, it is important to familiarize yourself with your spouse’s assets and any potential interest you may have in those assets. In many cases, particularly if these assets will not be paid out until a date fairly far off into the future, it may be helpful to consult an actuary or other financial advisor to calculate the present value of those assets. It is always wise to seek professional advice on the potential and the risks for all investments before you reach a settlement on those assets.
- Failing to file a Qualified Domestic Relations Order (QDRO): As we have noted, if your spouse has a defined contribution plan, such as a 401(k), 403(b), 457, or pension plan, you are entitled to a portion of that plan upon divorce. A WDRO is a legal document which reflects how you and your spouse have agreed to divide that plan, and it directs the company’s administrator to pay the agreed-upon share to the non-employee spouse. It is critical to obtain and submit one of these documents, as payments cannot be made without one. Don’t overlook filing a QDRO – the financial impact of doing so could be significant.
- Insisting upon keeping the family home even when you can’t afford it: Understandably, many people have a strong attachment to their family home. After all, our homes are the places where we make our memories and share our lives together. Regardless of the monetary value, the emotional value of a home is often much more. Unfortunately, this can lead to some difficulty during the divorce process, as it becomes hard for many people to let go of their home even when they realize they may no longer be able to afford it on one income. While the attachment to a family home is understandable, it may not be a wise financial decision in the long run to keep it. Attempting to hold onto a home that you cannot afford could leave you struggling under the weight of a mortgage, and maintenance bills, taxes and utilities that you simply cannot afford. While it may be difficult to separate your emotions from what is practical, in this case it is important to take a thorough and realistic look at whether you can truly afford to stay in the home and to make the decision that makes the most financial sense. While it may be difficult in the short term, in the long term you’ll be glad you did.
- Misunderstanding your responsibility to pay marital debt: In the majority of situations, if a debt was incurred during the marriage, then it is considered a joint responsibility. Just like dividing assets is part of the property division process during a divorce, so is the division of debts. It is important, therefore, to be aware of any debts that you and your ex may share, and to address those debts as part of your settlement. The ideal scenario is to pay off debts if possible before the divorce becomes final.
- Failing to take into account tax liabilities and penalties: Most significant financial decisions have tax consequences, and a divorce is no different. It is important to realize and keep in mind that you may incur a tax liability on the portion of the marital assets that you receive as part of your divorce settlement. One example might be paying taxes if you decide to withdraw funds from a retirement plan early, as well as potential penalties. There can also be different tax consequences for decisions you make with respect to support – for example you may pay different taxes on a lump sum distribution of alimony than you would if the money were paid monthly. Without question, taxes are a complex matter and it is certainly worth contacting a qualified professional who can help you to assess how best to handle the various issues you encounter during your divorce from a tax perspective.
- Failing to obtain enough alimony or child support, or failing to ensure your alimony: When many people enter into the divorce process, like any other complex legal matter in which they have never been involved it can be difficult to understand all of the nuances that may apply to their particular circumstances. It is no different when it comes to alimony and child support. Often, couples who are divorcing are unaware of exactly how difficult it is to modify an alimony or child support order after it has been entered. As a result, it is important to ensure that your alimony and child support terms are clearly stated and are satisfactory to both parties before they are agreed upon. In addition, it is important to realize it if your ex-spouse ultimately cannot pay alimony or child support then you will have nothing to collect. In the unfortunate event that your ex ends up disabled, deceased, or suddenly unemployed, you could find yourself left without any support. As a result, it may be wise as part of your settlement to request that your spouse obtain either disability and or life insurance policies to ensure that you and your children will continue to receive the support you need in the event of any unfortunate and unexpected event.
- Choosing the wrong attorney: Without question, divorce is a stressful, expensive, and time-consuming process. While it is impossible to avoid all of the stress and expense entirely, choosing the right attorney to help you through the process will go a long way toward relieving both the financial and emotional burden associated with divorce. The truth of the matter is that an attorney who is well-trained in the art of alternative dispute resolution may be able to help you and your soon to be ex-spouse work through your issues in a cooperative and effective way that ultimately results in a settlement that is satisfactory to everyone, and that is far less time-consuming and expensive then battling it out in a courtroom would be. Taking the time to interview and choose an attorney who you believe is truly qualified and experienced enough to help you through this process affectively will be well worth it in the long run.
Call the Law Office of Dustin S. McCrary Today
Divorce is difficult, and there is no way around that fact. While that is true, the good news is that even though it is difficult, it can be made manageable, and it is possible for couples to come through this process healthier and happier on the other side and ready to begin the next new chapter of their lives. While addressing all of the financial issues associated with divorce can seem intimidating, with the right legal knowledge and experience on your side, you can make decisions and choices that you are happy with and that are suitable for your family for the long-term.
At The Law Office of Dustin McCrary, it is our passion and our purpose to help families do exactly that. We would love to have the opportunity to help you through this chapter of your life and on toward the next new part of your journey. Call us today – we look forward to speaking with you soon.