Avoid These Financial Mistakes During a Divorce

Going through a divorce can be costly in many different ways. Hiring a divorce attorney will cost you money, but divorce is also costly to your mental and emotional health. Time and money are both spent in the divorce process, so you want to do your best to also avoid costly financial mistakes that can be made during and after the divorce case is finalized.

The best way to avoid any unintended financial mistakes is by talking to an experienced divorce attorney or even consult with a financial advisor. 

Make sure to consider all of your options before you fight tooth and nail for the marital home. Keeping the marital home would likely involve a refinance of the mortgage and a buy-out of the other spouse’s equity in the house. This refinance would increase the mortgage payments, so you probably won’t be paying what you used to be paying per month to live in the house.

Also, before the divorce, you and your spouse might have been sharing the cost of the taxes insurance and utilities, but now, you will be completely responsible for those monthly expenses. It's important to do your math before you start your fight for the house. Figure out if you will be able to afford the house, and whether those payments will be worth it.

2. Not Understanding the Different Types of Retirement Accounts

Remember that not all retirement accounts are the same; there are retirement accounts that offer a set payment for you each month upon retirement, defined benefit plans, which are usually pensions. The longer you work, typically the larger your monthly payment will be from the pension plan. 

The other retirement plans are defined contribution plans, which include IRAs and 401(k) accounts, and the like. These accounts allow you to withdraw funds upon retirement age (with certain limits set by the law), but the balances of these accounts differ based on the investments. Any funds that were added the IRAs or 401(k) accounts during the marriage, and any pension benefits that accumulated over the years of the marriage are all considered marital.

Knowing what retirement accounts exist between you and your spouse and how they will be divided will help you identify your current retirement position, and what action you might need to take in the future to feel secure about retirement. 

3. Forgetting to Account For Taxes

Just about everything about your tax situation is going to change upon a divorce. You will have a new filing status, different tax bracket, and possibly a change in the dependents you claim if you or your spouse will get to claim the minor children, or you alternate each year. It is important consider the tax implications of divorce before your case is final so you can adjust your withholdings appropriately on your paychecks.

You also need to consider your future liability regarding your income. If you have dividends, sell stocks, or withdraw funds from your retirement, this could negatively affect your tax liability for the next tax year. Consider meeting with an accountant or other tax preparer to avoid surprises about your tax liability once the divorce is final. 

4. Assuming “Equal” Division Is the Fair Division of Property

A house during a divorce does not have the same value as a retirement account. A rental property does not have the same value of a car. When trying to settle a case, it's important to think about more than just the inherent value and whether it is worth it on your end to fight for an unequal division of some assets.

If you are planning on receiving half of the equity from the marital house, that is money you get at the divorce and unless you invest it, that’s all the money you get; however, a retirement account that is divided has the potential for losses and gains but hopefully gains if you won’t be retiring for many years. A car’s value goes down the longer it is used and the older it gets, but a rental property has the potential to earn you additional income despite having bills to pay and potential loss in value.

Consider the real value of the property and other assets you are going to be dividing in your case and think about what might have more value for you based on your financial situation currently and in the future. 

5. Don’t Make Financial Decisions Based on Your Emotions

It’s understandable that people will be emotional during their divorce; however, you have to attempt to separate your emotions from trying to settle the financial side of your case.

One spouse might want to fight tooth and nail for their pension, or their house, or even a particular car because they want to get back at the other spouse knowing that the other spouse also wants those particular items or property. Even worse is fighting over small items, like lamps, silverware, or other household items just because you don’t want your spouse to get them. Allowing your emotions to get in the way can drag the case out causing additional, and unreasonable litigation, ultimately resulting in higher attorney fees.

Take time to deal with your emotions before making any financial decisions, and consider your future financial security more seriously rather than focusing on getting back at a spouse. 

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