February 20th, 2023
During the course of your marriage, you and your spouse likely shared financial responsibilities, budgeted together, and pooled your incomes. However, divorce can bring about many financial changes — and the process requires you to take a close look at the economic picture of your marriage. Your financial circumstances may change dramatically after divorce, and the decisions you make throughout the settlement process can have lasting economic implications.
It’s important to be aware of the financial pitfalls to avoid during divorce and the steep consequences that can come with them. The following are some of the most common financial mistakes during divorce.
Not Understanding Your Marital Finances
One of the biggest financial mistakes during divorce is not having a clear picture of your finances. If you allowed your spouse to handle all the financial matters during your marriage, you should gather all the financial information you can once you anticipate divorce. For instance, tax returns, checking and savings account statements, credit card statements, loan or mortgage documents, income and benefits, and retirement account documents can help you understand the financial circumstances of your marriage and the value of your marital assets.
Disregarding Tax Consequences
Many of the financial decisions you will make during the divorce process may have tax implications that might not be readily apparent. It’s essential to consider the possible tax consequences when it comes to things like claiming dependents and property division, particularly relating to the nature of assets being divided and possible embedded taxes. It’s often helpful to seek the advice of an accountant who can advise you regarding how your taxes could be affected by divorce — and how they can be minimized.
Not Dividing Retirement Assets Correctly
Retirement assets can be complex and it’s important to ensure that they are divided correctly. Some types of retirement assets cannot be divided by a divorce decree and may require a Qualified Domestic Relations Order. This is a specific legal document that orders the plan administrator to distribute the stipulated portion of benefits to a spouse. These documents must be drafted in a certain way and approved by the plan administrator after the divorce is final.
Failing to Create a Post-Divorce Budget
Your post-divorce financial circumstances may be very different from your financial situation during the marriage. Often, people underestimate the living expenses they will incur following divorce. Since you won’t have two incomes to rely upon, it’s crucial to create a post-divorce budget that you can stick to. Be sure to factor in your expenses for housing, utilities, groceries, clothing, transportation, and other costs — it can be very easy to overlook certain monthly expenses and underestimate your expenses. And it is important to understand what your new tax rate will be when you are filing as a single person, with or without children.
Rushing into a Settlement
You should never rush into a divorce settlement without making sure you know your legal and financial rights. If you don’t thoroughly understand your rights under state law, you could potentially sign a settlement agreement that is not in your favor. Even if you think you and your spouse agree on all the issues that must be decided to divorce, it’s best to consult with an experienced divorce attorney and review your settlement agreement with them.
Fighting to Keep the Marital Home
The marital home is usually one of the largest assets spouses own together. For many couples facing divorce, it can also be the asset that is most contentious to part with. It’s critical not to allow your emotions to get in the way of an accurate financial assessment. If you cannot afford to keep the family home, you should consider all possible viable options, including selling the house and splitting the proceeds or exchanging the home with your spouse for another asset.
Not Considering Mediation or Collaborative Divorce
A common financial mistake during divorce is quarreling over every asset or piece of property. Not only does this mean more time is spent in litigation to resolve the matter, but it also results in incurring more costs. Mediation and the collaborative divorce process are two alternative dispute resolution methods that can significantly reduce the cost of divorce. By facilitating healthy communication and encouraging spouses to reach a settlement, the parties can remain in control of the outcome of their case — and the expenses associated with it.
Learn More About Avoiding Financial Mistakes During Divorce
If you are thinking about parting ways with your spouse, it’s crucial to avoid making financial mistakes during divorce. A knowledgeable divorce attorney can provide you with the advice and counsel you need to move forward successfully. Divorce and family law attorney Louise Livesay has been dedicated to helping clients in the Twin Cities area resolve divorce matters peacefully and respectfully for over two decades. We welcome you to contact us online for a consultation or by calling 651-294-2338.