Financial Mistakes to Avoid When Going Through a Divorce

Divorce is a major life change for spouses and their children. The process is often stressful and emotional. As a result, mistakes can easily be made that may prove very costly in the future or that can negatively impact the quality of life you hope to enjoy as a single person. These are some of the common financial mistakes to avoid.

Failing to craft a realistic budget for life after divorce. Divorce usually has a substantial impact on the finances of both spouses. The same income amount used to operate one household must now support two. It is critical to prepare a realistic post-divorce budget based on your personal income plus any child or spousal support you realistically expect to receive.

Consider costs for housing, utilities, food, clothing, health insurance, transportation, gifts, entertainment, and other routine expenses. Factor in annual inflation costs. This will help to guide your decisions about dividing property and debts. Particularly where there are numerous or substantial assets and debts, it may be wise to consult a financial planner about any proposed divorce settlement before signing it.

Becoming emotionally attached to the family home. This may be easier said than done, but you should approach divorce as a business transaction. Remove as much emotion as possible when making decisions. You may be emotionally attached to the family home and want to keep it, but you need to analyze whether you can afford mortgage payments, insurance, taxes and upkeep.

Wanting to keep the home at all costs may result in giving up too much other property that could have secured a more stable financial future. Consider downsizing and splitting the net proceeds of the home sale on a percentage basis. Just be sure to have realistic expectations of the amount that may be realized after selling costs and the length of time needed to sell the home.

Failing to secure support with insurance. Child support or alimony you will receive following a divorce ends if your former spouse dies. The amount you're counting on could also be substantially reduced if the paying spouse becomes disabled.

To safeguard against these possibilities, the person responsible for paying child or spousal support should be required to obtain disability and life insurance. If you're the one receiving payments, you might even consider paying a small portion of the premium to help ensure that the funds you're counting on will not suddenly vanish.

Not paying off unsecured debt. In addition to dividing property, you must divide debts. Your divorce decree will state who is responsible for paying for each debt. However, the decree does not limit the actions of creditors. Unsecured debt such as consumer credit card debt incurred during the marriage remains a joint liability even if one spouse is ordered to pay the debt.

If your spouse fails to pay the debt as ordered, the creditor may come after you for payment. The best course of action is to pay off any joint, unsecured debt before the divorce is finalized. At the very least the decree should include a hold harmless provision that would allow you to return to court and seek compensation for payments you make toward a debt your spouse was required to pay.

Disregarding tax consequences. Acquiring property through divorce often brings tax obligations. The sale of a home, stocks or investments may trigger capital gains taxes. Consider the value of any property you may receive on an after-tax basis. Ideally, spouses should work together to minimize tax liabilities.

401(k) funds and other pension plan funds can usually be transferred without incurring tax consequences. However, if you will be receiving funds from these types of accounts and plan to withdraw them as part of a post-divorce budget, the funds may be taxed and you could incur additional financial penalties.

Failure to obtain a QDRO. If one spouse is awarded a portion of the other's spouse's pension account, a court-approved Qualified Domestic Relations Order (QDRO) is often required to ensure payments are made. A QDRO orders the plan administrator to pay the non-employee spouse the court-ordered amount.

Even if payment is not expected for many years, a QDRO that meets the pension plan's requirements should be entered at the time the divorce decree is signed. Failure to obtain a QDRO could result in a lack of payment or at least a costly and time-consuming hassle when it is discovered a QDRO was never entered at the time of divorce.

Improper use of an attorney. The hourly billable rate for many attorneys can easily be $300 or more. Hiring a combative attorney or directing your attorney to seek revenge on your spouse by repeatedly dragging him or her into court to resolve every little issue will run up the legal fees on both sides. Higher fees mean fewer assets will be available for distribution.

Similarly, expecting your attorney to be your mental health counselor or financial planner will also run up the bill. Rely on friends, family and other professionals to deal with non-legal issues.

Representing yourself. You may think it will save you money to represent yourself in a divorce, but avoiding payment of attorney fees may cost you substantially in the long run. You increase the chances of missing something vital that could substantially impact your financial well-being by going through a divorce without legal representation. Divorce laws differ by state. An experienced family law attorney will understand the specific property division philosophy employed in your state and can help ensure that all property and debts are disclosed and thoroughly evaluated.

Finally, don't overlook the value of mediation to resolve differences short of trial. You may save tens of thousands of dollars by avoiding preparation for and conduct of a trial. Also, as soon as you know divorce is on the table, open a bank account in your name only and begin setting money aside. Either spouse can drain joint bank accounts, so you want to be sure you have funds available that only you can access.

A primary focus for anyone going through a divorce must be to ensure that there will be sufficient liquid assets to pay monthly bills after the divorce. Taking the time to carefully consider the big financial picture and to create a realistic budget for life after divorce should help to provide a solid financial foundation for the future. If you are considering filing for a divorce, call the Law Offices of Peter Van Aulen at 201-845-7400 for a consultation.