The decision to get married is, in so many ways a decision to make two lives one – and finances are no exception to this rule. More often than not, married couples combine their debts, assets, and bank accounts, and budget together. This is understandable, and is completely reasonable for married couples to do. During a divorce, however, trying to sift through all of your combined financial information and make wise, informed decisions regarding your money can be difficult, to say the least.
Divorce is already a very emotional time for many, and confusion over the best steps to take from a financial perspective can only add to the stress. The key to help reducing that stress is being prepared, and thinking ahead. While thorough preparation and planning certainly won’t remove the stress of divorce entirely, it can go a long way toward making the process go far more smoothly than it would otherwise.
Part of preparing is thinking ahead and avoiding potential pitfalls – and when it comes to financial matters, there can be many. Some of the most common financial mistakes made during the divorce process include:
- Lack of Financial Knowledge: It is actually not at all uncommon for one spouse to entirely manage the budget during the course of the marriage, while the other spouse has very little knowledge of where the couple’s financial situation stands. If you are contemplating divorce, or are already in the midst of the divorce process, however, it is critical that you quickly become informed about your finances. You should learn about all sources of income that you and your spouse might have, including salaries, investments, and benefit plans, as well as any outstanding debts the two of your may have together. Know how much you have in your bank account, and what other important assets and debts you share together. You should also be aware of any employer-funded pensions and investments that your spouse may have, as you will be entitled to a share of those, even if payments do not occur until retirement. Don’t hesitate to ask for copies of any financial reports and statements that would be helpful to your understanding of your financial situation. It may even be helpful to secure the help of a financial professional who can help to calculate the present value of assets like pensions, investments, and retirement accounts, to be certain that the share of those assets which you ultimately receive is equitable.
- Failing to Consider Marital Debt: During the divorce process, most couples focus on their assets, and how to divide those in a manner that is satisfying to both parties. All too often, however, couples fail to also thoroughly consider their debts. The reality is, however, that debts have to be divided just as assets do. In the vast majority of cases, any debts incurred by either party during the course of the marriage are considered shared debt. Lenders and credit card companies, for example, will hold both parties responsible for a default on payment, even if only one party primarily used the card. If at all possible, it is wise to avoid the stress of dealing with debt by paying off all marital debts before the divorce becomes final.
- Underestimating Monthly Spending: This is a common, but very dangerous mistake made by those going through a divorce. Think carefully about what your cost of living is likely to be once you are separated, and budget accordingly. It is often wise to consider your current cost of living and then also to leave a cushion for unexpected future costs that may arise as well. Failing to create an accurate budget creates the risk of being unable to maintain your current quality of life. It can be very helpful, and a wise decision to create a monthly budget that includes all of your current expenses, as well as possibly consulting with a financial professional who can help to ensure that you have consider all current costs, as well as potential future expenditures.
- Keeping a Home You Can’t Afford: Of all financial decisions that have to be made during a divorce, this one is often, understandably, one of the most difficult. After all, a house is more than just an asset – it’s a home. It’s a place where you’ve made your memories, where you’ve shared your moments. As a result, it can be very, very difficult to let it go. Unfortunately, however, too many people make the mistake of being swayed so strongly by those feelings that they keep the home, ultimately to their financial detriment. A home that you could once afford on two incomes may be very difficult to maintain on one income alone, even if your spouse is paying support. Often, in their desire to keep the home, people do not factor in the costs of utilities, repairs, taxes, changes in the market, and other factors that could contribute to making it a very difficult situation financially. Think through this decision carefully, and allow your head, and not only your heart, to guide you.
- Assuming that an Equal Division of Assets is “Fair”: A commonly made and very understandable mistake is assuming that an “equal” division of assets is a fair division of assets. It is important to remember that the value of a marital asset is by no means limited to its current market value. Consider, for example, a home that the couple owns together but rents out to others for the purpose of generating income. In that case, the house may actually be worth more than its fair market value. As a result, if you were only to consider the actual market value of the house (and not the rent as well) in making a determination of what was “fair,” one partner would actually be receiving less in the long run. As a result, instead of dividing property solely based on its current market value, without taking the full and future value of the assets into account can be and unwise decision. If necessary, consult with a financial advisor to fully understand the current and future value of assets before making the final determination as to how to divide them.
- Keeping Enough Cash: Between the date of separation, and the date that the divorce ultimately becomes final, it is not uncommon for people to find themselves in a state of financial uncertainty. Keeping enough cash in an account that you will always have access to is important to ensure that you are able to provide for yourself throughout the divorce process. Even if you are only contemplating divorce, starting to save up a safety cushion is a wise decision to protect yourself in the event of any unforeseen difficulties.
- Trying to Hide Assets: Without question, divorces can be contentious and difficult, and depending upon the circumstances, spouses can often harbor very harsh feelings toward one another. Some spouses feel a strong desire to hide assets from the other spouse – but this is highly ill-advised. Doing so is not only illegal, but will also severely affect your credibility in court, and give your spouse a definite advantage in the divorce proceedings. It is therefore always best to declare all of your assets honestly, and facilitate a full and fair divorce settlement. Doing so always benefits both parties in the long run.
- Failing to File a Qualified Domestic Relations Order (QDRO): A QDRO is a legal document that reflects the manner in which you and your spouse have agreed to divide a defined contribution plan, like a 401(k), 403(b), 457 plans, or a pension, for example. A QDRO serves to direct the company’s plan administrator to pay the agree-upon share of the plan to the non-employee spouse. These payments cannot be made without a valid QDRO in place, so it is essential to file a QDRO, or potentially risk losing your share of a valuable asset.
- Disregarding Tax Implications: Divorce requires the consideration of several tax implications. From receiving spousal support to withdrawing funds from retirement accounts, it is important to consider your obligations from a tax perspective.For example, when a judge awards alimony, the IRS considers that to be taxable income, whereas the paying spouse may write it off as a deduction. Retirement accounts also carry certain tax and penalty rules, and it can be very helpful to seek the advice of a qualified attorney, as well as an accountant that will be able to advise you about any potential tax implications before you agree to a final property division.
- Failing to Secure Alimony or Child Support Payments with Insurance: Most people are aware that the divorce process includes either agreeing upon, or having a court determine monthly alimony and child support amounts to be paid by one spouse to the other. What most people don’t consider, however, is securing these payments with an insurance policy. While most of us don’t like to dwell too long on the possibility of tragic events, the reality of life is that your ex-partner could die or become disabled. In that event, without an insurance policy, alimony and child support payments would stop. It is therefore wise to request that your spouse either invest in life insurance and disability policies that name you as the beneficiary, or modify current policies to account for this possibility. Doing so will protect your rights, and help to ensure that payments continue despite unexpected losses or injuries. In some cases, parties choose to structure their divorce agreement such that part of the alimony or child-support payments are diverted toward paying for this coverage.
- Failing to Attempt Mediation: Certainly, the divorce process can be contentious. Often, couples may feel, especially at the beginning of the process when emotions are still very fragile, that they will not be able to cooperate. Cooperation is certainly worth every effort, though. The truth of the matter is that long, drawn-out litigation can be costly, time-consuming, and stressful. Couples who ultimately want to make it through the divorce process with more money in their bank account at the end would be a wise decision. By choosing mediation, the parties not only save money, but also have more flexibility to make the decisions that work in their best interest.
- Choosing the Wrong Attorney: This goes hand-in-hand with attempting mediation, and being able to work collaboratively with your spouse and his or her attorney during the divorce process. Choosing an attorney who is too contentious and aggressive may actually contribute more stress than assistance during the divorce process. Lengthy, drawn-out divorce fights are costly – both financially, and emotionally. It is almost always best to choose an attorney who understands the law, who has the necessary experience to apply that knowledge, and who can work cooperatively with the other side toward effectuating a settlement that ultimately serves everyone’s needs.
Being aware of and attempting to avoid these mistakes can be essential to making wise decisions that will have long-lasting implications. Nevertheless, it is also always helpful and a smart choice to engage the advice of a knowledgeable and experienced attorney, as well as a financial advisor, if necessary, when going through this process. There is no substitute for experience, and having the right guidance and help can make a very complex process much more manageable. At the Law Office of Dustin S. McCrary, we’re here to do exactly that. We understand divorce, and we’re passionate about helping families through this time with the best professional counsel and assistance available. We would be honored to help you too. Call us today.