You and your ex likely shared finances and budgeted together during your marriage. These practices make sense in a marriage but require careful reevaluation during a divorce. Divorce necessitates a detailed review of your income, expenses, and assets to make crucial decisions with lasting implications. Many people need to pay more attention to the complexity of these issues and the importance of making informed choices. Here are the most common financial mistakes made during divorces and tips to avoid them.
1. Not Knowing Your Marital Finances
To achieve a fair financial outcome, you must understand your marital finances. This involves thoroughly reviewing all income and expenses, including salaries, investments, and benefit plans. They might have an advantage during settlement negotiations if you ex-managed the budget. Ensure you have access to all financial reports and statements.
Tip: If you suspect your ex is hiding assets, inform your attorney and possibly the court. Failing to disclose assets is illegal and can result in contempt of court.
2. Underestimating Personal Monthly Spending
Determine your monthly expenses and projected cost of living post-divorce. Your budget should reflect your current standard of living, account for future inflation, and include insurance costs. This budget will form the basis for calculating alimony. Accurate budgeting is crucial to make sure your future needs are accurate.
Tip: Write out all your expenses and consult a financial professional to ensure your budget is accurate and complete.
3. Not Setting Aside Cash for the Divorce Process
The period between separation and finalizing the divorce can be financially uncertain. Save money now to provide for yourself during the divorce process. This safety net can cushion you in case of job loss or delays in alimony payments.
Tip: Be honest about all current assets, including your safety net, to avoid legal issues and tension.
4. Assuming “Equal” Division is Fair
Its current market value does not solely define an asset’s value. Income-generating assets, like rental properties or bonds, may be worth more over time. Consider their long-term value instead of dividing assets based on current monetary value.
Tip: Consider associated tax costs, transactional fees, and other hidden expenses.
5. Wanting to Keep the Family Home When You Can’t Afford It
A house has emotional value, but it’s essential to be realistic about your financial capacity. If you cannot afford the home, consider letting it go to avoid future financial strain from mortgage, maintenance, and property tax costs.
Tip: Make financial decisions based on facts and calculations, not emotions.
6. Not Knowing Your Ex’s Work Benefits and Stock Investments
You may be entitled to a share of your ex’s employer-funded pensions and investments. Please familiarize yourself with all their assets and your potential rights. Defined benefit plans, 401(k)s, and company stock may need to be divided.
Tip: Consult a professional to assess investment risks and potential returns before agreeing to a settlement.
7. Not Filing a Qualified Domestic Relations Order (QDRO)
A QDRO is necessary to divide defined contribution plans, such as 401(k)s or pension plans. With a QDRO, the plan administrator can pay the non-employee spouse.
Tip: Ensure you file a QDRO to protect your rights.
8. Ignoring the Impact of Tax Liability and Penalties
Consider the tax implications of spousal support and asset division. For example, withdrawing funds from a retirement plan may incur taxes and penalties. Paying or receiving a lump sum instead of alimony can help avoid income tax implications.
Tip: Consult a tax professional to understand the tax implications before agreeing to a property division.
9. Not Understanding Responsibility for Marital Debt
Debts incurred during marriage are typically shared liabilities. Dividing responsibility for these debts is part of the divorce process, but debtors may not honor the arrangements between you and your ex.
Tip: Pay off marital debts before finalizing the divorce to avoid future complications.
10. Not Securing Enough Alimony or Child Support and Failing to Insure It
Ensure alimony and child support terms are comprehensive and clearly stated. Modifying orders can be challenging. Additionally, consider requesting your spouse obtain disability and life insurance policies to secure your support in case of disability, death, or unemployment.
Tip: Negotiate to include insurance policy costs in alimony and child support payments.
11. Choosing the Wrong Attorney
Your attorney plays a critical role in your divorce process. An aggressive lawyer may cause negotiations to become hostile, increasing litigation costs. Choose an attorney who advocates for your best interests professionally and tries to keep emotions out of the process.
Tip: Consider mediation to save time and money. Mediation involves a neutral third-party family law attorney who helps you reach a mutually agreeable settlement.
The Law Office of Dustin McCrary – Supporting You Every Step of the Way
Divorce finances can be complex and overwhelming, but you can avoid common mistakes with careful planning and the proper support. At The Law Office of Dustin McCrary, we provide the guidance and expertise you need to navigate your divorce successfully. Contact us today to learn how we can help you achieve a stable and fair financial outcome.