Divorce is hard enough, but these 5 common divorce settlement mistakes can make it even harder. Read on to discover these common mistakes so you’re better prepared to avoid them and proceed more smoothly into your next stage of life.
1. Overlooking Debt & Credit Rating Issues
One of the biggest mistakes you can make during a divorce is to overlook or underestimate debt and credit rating issues. To avoid unpleasant surprises, one of your early steps should be to obtain your credit report.
Once you have your credit report in hand, you’re in a better position to have an “inventory” of all of your credit accounts. Even if your divorce agreement stipulates that your ex-spouse will pay off certain debts, creditors can still come after you as a joint applicant if your spouse stops making payments. Perhaps even worse, your credit score could take further hits, which could prevent you from qualifying for a mortgage or other personal loan.
The best strategy might be to agree to pay off shared debts before the divorce is finalized.
2. Not Understanding Asset Liquidity
When assets are divided, they’re sometimes divided according to monetary value regardless of how liquid (i.e., easily accessible) that money is. For example, the value of a shared home may be significant, so it’s assigned a high value in the division process. You may also feel emotional attachments to assets like your home, which is not in your best interest if you can’t otherwise afford the mortgage payments.
Because you can’t easily withdraw cash from a home’s value, continuing to pay for the mortgage and maintain the home would be difficult without the necessary cash flow to do so. Therefore, one of the most common mistakes in a divorce settlement is to fail to understand the liquidity value of the assets in your proposed settlement agreement.
Accepting a “50/50” division of assets may not be a wise decision if your assets and cash flow do not maintain them - you may end up losing them or experiencing other financial hardships. Therefore, you need to take liquidity into account during the division process.
3. Underestimating Taxes
Likewise, failing to account for taxes—and especially the varying taxation on different types of assets—can be detrimental to your financial security. Just as with asset liquidity, if you’re offered a “50/50” division of assets but your share of the assets comes with a higher tax burden, the settlement doesn’t end up being equitable.
Familiarize yourself with the tax liabilities embedded within various assets such as investment and retirement accounts, real estate, and business entities if you plan to sell those assets for cash flow. Pre-tax retirement assets will not have the same value as an equal dollar amount of non-retirement assets, if you consider tax obligations (and potential early withdrawal penalties).
4. Failing To Identify Hidden Assets
If you suspect your ex-spouse is hiding money, it may become necessary to hire an experienced attorney or even a forensic accountant who can help to uncover these assets. Common hidden assets might include any of the following:
- Secret bank accounts
- Secret investment accounts or properties
- Business income hidden either by the business or a friend
- Money transferred to a child’s savings account
Unfortunately, ex-spouses may use any number of unethical means to protect money they want to keep for themselves. Failing to uncover hidden assets can cost you thousands (or much more) in money you would otherwise be entitled to.
Furthermore, it’s important that you maintain insurance protection for Spousal Maintenance and Child Support payments, especially if you depend on these payments to cover your family’s living expenses. Make sure the spouse responsible for the payments isn’t the owner of the insurance policies. YOU should be the owner so that you have full control over your own security.
5. Trying To Navigate Divorce On Your Own
No matter what, divorce is tough. You may hit snags and face unforeseen circumstances during this process, so you need a team of experts behind you. In addition to hiring a good divorce attorney, you need a financial advisor who specializes in serving women experiencing life transitions. We will help you make sure you’re looking at the big picture and analyzing how each financial decision impacts other decisions, especially from a long-term perspective.
In addition to helping you make decisions through the divorce, we assist you in planning for financial success moving forward. A “Post-Divorce” Financial Plan is just as important as your strategy to navigate the divorce itself. Part of your plan should include updating your estate planning documents and your beneficiaries for life insurance, retirement plans, and bank accounts. Call our office at 845-278-8638 or send us a message to set up a complimentary consultation.
Michael Durante is a founder, Certified Financial Planner™ (CFP®), and Certified Divorce Financial Analyst™ (CDFA®) at Infiniti Wealth Management, an independent, fee-only financial advisory firm. With over 25 years of experience, Mike specializes in serving women who are going through a life transition, whether that’s a divorce or the death of a spouse, as well as pre-retiree and retiree couples. He is passionate about helping his clients develop a personalized financial plan based on their values and goals so they enter retirement with confidence and peace of mind. Mike has both a bachelor’s degree in business administration and an MBA from Pace University. When he’s not working, Mike loves spending time outdoors hiking, biking, walking, golfing, campfires, the beach and doing yard work, as well as spending time with family and friends. Mike also enjoys to read, travel, and check out local restaurants and events. To learn more about Mike, connect with him on LinkedIn.
April 23, 2021 - Michael Durante, CFP®, CDFA®