When you are in the middle of the divorce process, you will need to make many decisions, often under quite a bit of pressure. Some of your decisions may involve custody matters, while others may center on finances. What you do today will have a large impact on your future. Today’s mistakes can be tomorrow’s insurmountable burdens. Because your legal situation is intertwined with your financial status, it is important to avoid making the following financial mistakes that often arise as a result of the divorce process.
Keeping the House at All Costs
Many people want to keep the family home because it means they can maintain some semblance of continuity. They may be willing to do this at all costs. Staying in the family home means that you would need to buy out the other spouse’s interest. It may require you to devote all of the assets you would have otherwise received in the divorce, leaving you with little to no funds for the future. Then, you may find that your ability to retire on time or afford your common expenses is curtailed.
While you should certainly explore keeping the house if you are able, you should also be realistic. If you do not have the financial ability, or if it is too much of a stretch for you, it may be better to sell the home or let the other spouse try to keep it. You should undertake an honest evaluation of your finances to see what you can afford. There are some cases where it may make the most financial sense to let the house go.
Neglecting to Consider Taxes
When you are dividing assets in a divorce, not every asset is created equal. Some may have been purchased years ago and may have large amounts of capital gains tax liability. If you end up with that property, you would be the one who must pay the taxes. If you keep the property, you should at least adjust the distribution of the assets to account for the fact that you would need to pay taxes. Many people who have gotten divorced receive an unpleasant surprise in the future in the form of a tax bill. You should consult with an accountant or financial advisor to plan for future tax bills that may come after your divorce.
Not Planning for the Future
When you are going through a divorce, you may only be able to see into the immediate future. Since divorce is a trying time, you may be most worried about short-term survival; however, there is a bigger picture you also need to see.
While you must be worried about today, you need to also consider tomorrow. You may have longer-term financial goals, such as retirement, that may be directly impacted by what you do today. If you put yourself in a precarious financial situation today, it could affect your long-term financial future.
At the same time, you must also have a realistic view of the future. This means that you have a strong idea of what your expenses may be and what you need to cover them. You should also not have overly rosy expectations for the investment performance of your assets. On the contrary, you should conservatively estimate potential investment returns in your calculations.
Blindly Trusting the Other Spouse
In every divorce, there is a time when the two spouses need to exchange financial information to divide the marital property. The other spouse is legally obligated to turn over information on their assets. Some spouses try to hide assets in a divorce, even though it is both wrong and quite risky. If they are caught, the court could award you more of the marital estate. You should not simply accept what the other spouse gives you without making some attempt to verify the information – and an experienced divorce lawyer will do the digging for you. If something does not seem right, your attorney will question it and may even need to hire a forensic accountant to piece together more of the picture. Although you may be able to take legal action in the future, it is better to have a complete understanding of the other spouse’s finances as soon as you can develop it.
Not Protecting Yourself from Unsecured Debt
Spouses may assume they are not legally responsible for debts that the other spouse incurs after they separate. However, if there are joint accounts or a joint credit card, you may be obligated to pay for debts that the other spouse runs up during the divorce proceedings. Even though each spouse is obligated to pay for the debt that is in their name, you must be careful about joint accounts. Once you decide to get divorced, you should cancel all joint accounts so the other spouse is not able to incur additional debt you would be legally responsible for having to pay off. In doing so, you must ensure you remain in compliance with any temporary orders issued by the family court judge.
Not Getting Expert Advice
Some financial planners specialize in divorce. They have the ability to see and understand your situation and point out things you might overlook. You have enough on your plate, and it is expected that you may not be able to consider everything at once; however, that is exactly what you need to do. You should consult with a financial planner to put a financial plan in place which may dictate how you negotiate the terms of a divorce agreement. Your divorce attorney may be able to recommend someone with whom you can work.
There are multiple pieces of the puzzle to consider during a divorce. Not only should you hire an experienced high-net-worth divorce lawyer to represent your legal interests, but you should also consider consulting with a financial advisor to get a better picture of what you may need to do financially. Once the divorce agreement is signed and entered by the court, you may lose the ability to fix any problematic sections that a financial advisor could have warned you about.