February 7, 2023
What are the most common financial mistakes made during a divorce? In a divorce, you effectively separate your life from your ex-partner’s. Inevitably, that also means that you are separating financially. Aside from parental rights, finances are the main factor that is decided upon during divorce proceedings.
If you aren’t careful during your divorce, you could end up losing the shirt off your back, so to speak, and you wouldn’t be the first person to make a financial mistake during a divorce, either.
Most people don’t fully understand the dangers of divorce and don’t ask enough questions of their divorce lawyer, so if you are going through a divorce, make sure to avoid these common missteps:
Attempting to Hide Resources
During a divorce, both sides are represented by their own divorce attorney, who is experienced at finding hidden resources that rightfully belong to their client. With that being said, if you were to try to hide money or property, there is a good chance your ex-partner’s divorce attorney would discover your actions and use them against you in court.
Insisting on Getting the House No Matter What
Your house is, most likely, the most valuable asset in your marriage. For many couples, their house has greater value than all of their other resources combined. With that in mind, if you insist on keeping the house, your ex-spouse will likely receive every other resource you once shared, and you will be left on the hook for extremely high alimony to cover the difference.
Forgetting About Tax Implications
The IRS has a slew of regulations in place regarding divorces. Publication 504 explains the tax implications of getting divorced, and while your divorce lawyer can explain things in more detail, the short version is that alimony payments can’t be deducted from your taxes if you are recently divorced, and your filing status will only change once the divorce is finalized.
If you file your taxes incorrectly, the IRS will charge significant penalties, and you may be subject to an audit, making for a financial nightmare you don’t want to face.
Big Expenditures Before or After the Divorce
Many people going through a divorce will go shopping as a means of distracting themselves from the impending separation and resulting hardships, and after a divorce, you may need to replace several assets and resources that you lost, like a car or pieces of furniture.
As a rule, you’ll want to avoid spending big just before or right after a divorce. Those bills can haunt you once the divorce is complete, and you’re left realizing that your financial situation is significantly weaker than it was before. If you need to replace a big ticket item, like a car, buy it used or lease it.
Spending Too Much on a Divorce Attorney
While a good divorce lawyer will help you avoid going broke after a divorce, a divorce attorney won’t suddenly make you a millionaire, either. You should be careful about how many hours of work you ask your divorce lawyer to complete. At rates of a few hundred dollars an hour, the fee of a divorce attorney can build up quickly.
Cashing in Investments
You’ve invested your money for a reason. Whether you were trying to set aside money for your retirement or pay for your children’s college tuition, your investments exist to ensure a better future for you and your family.
As tempting as it might be to cash in to get an influx of money during the divorce process (especially if and when bills are mounting), you’re better off getting a loan, as you will lose more money cashing in your investments than you will through paying interest on a loan.
If you are trying to get a fair allocation of property at a relatively low cost, mediation is often your best bet. It typically takes a lot less time than a trial, which means the divorce proceedings end more quickly, and you’ll spend less on your divorce lawyer. Furthermore, the results will be roughly the same as if your case went to trial.
Trying to Punish Your Spouse
Even if your spouse cheated on you, trying to punish them financially simply isn’t worth your time, effort, or money. The system already favors the spouse who has fulfilled their commitments to the marriage, so you don’t need to go out of your way to financially harm your future ex-partner.
Generally, all that will happen if you try to punish your spouse is that you will spend more money on a divorce attorney than you should while still getting roughly the same results.
Accepting the First Settlement Offer Just to End the Marriage
The worst part about the divorce process is that your marriage isn’t officially over until the process is completed. Due to this, you may be tempted to accept any settlement offer just to finalize the divorce sooner, but that is likely to cost you money. If your emotions are too raw to make wise decisions regarding your divorce, consult with your divorce lawyer and follow their recommendations.
Not Having a Financial Plan
Most people don’t know what they want, financially speaking, while they are in the midst of a divorce. They are so used to the status quo that they just want everything they used to have, but unfortunately, that isn’t possible.
After your divorce, you will have less money and property than you had before. You, therefore, have to be realistic about planning for what you need to continue with your life. Create a detailed plan before negotiations begin so you know what your priorities are and what you can live without.
Forgetting to Update Your Will
If you created a will while you were married, it likely listed your spouse as your heir. You want to change that after a divorce. As soon as you know the exact details of your divorce decree, change any estate documents that reference your ex-spouse.
Not Hiring a Divorce Lawyer
Attempting to get divorced without legal representation is the biggest financial mistake you can make. Your spouse will undoubtedly be represented by a divorce attorney, and that experience will help them receive a better outcome from the divorce decree.
When facing a divorce, research available divorce lawyers carefully and pick a reasonably priced one who has an excellent record of getting clients fair settlements. Doing so will maximize the amount of money and property you keep after your divorce.