5 Money Pitfalls to Watch Out For In Divorce

If you are going through a divorce you will experience many different emotions; fear, anger, resentment and distrust are just a few. All of these emotions can wreck havoc on your finances. You will be making major financial decisions while your emotions are influencing your choices. The decisions you make during a divorce will impact you for decades, so here are five common mistakes to watch out for during a divorce.

1. Choose your attorney with caution

If you can end the relationship without a legal fight, you will begin your new life with far more money. Legal battles are very expensive. A good attorney can prevent you from making a major financial mistake, but be cautious, because it’s easy to be taken advantage of during a divorce. There are many ethical attorneys practicing family law, but there are a few that will take advantage of people when they are most vulnerable. Because of the design of our legal system, attorneys may provoke fights between spouses that result in long, drawn out, legal battles that will drain your assets. These stressful battles rack up fees that, if prevented, could have been used for retirement, education or bills. Consult with many attorneys until you find one you are comfortable with and who is interested in efficiently resolving the divorce. You do not want an attorney that will drag you and your spouse through an unnecessary battle.

2. Leaving debt in your spouse’s name

During marriage you probably obtained credit that was also in your spouse’s name. It’s very important to pay off or refinance debt so it’s only in the name of the spouse that will be obligated to pay the debt. Often one partner takes responsibility for joint debt which leaves the other at risk of negative credit ratings from late payments. Even if payments are made on time, the other spouse may worry about the payments which can lead to stress and arguments.

3. Staying in the house

For some reason, during a divorce spouses will fight to the end to keep a house. There is probably a scientific reason for this, but I assume it’s because we want to maintain some stability in what is otherwise an out of control situation. The income that used to support your family must now support two. Keeping the home that was probably a stretch on the finances before now spreads the budget even thinner. More often than not, selling the home allows both parties to downsize until they are able to reestablish themselves. Sometimes we take one step back to take two steps forward. So try not to fall in love with something (a house) that can’t love you back.

4. Not considering the tax consequences

Divorce may force you to make the largest financial decisions you will make in your life. You may need to sell or refinance your home. Your retirement accounts may be split or used for other expenses and you may have alimony and child support obligations that last for decades. These transactions can have huge tax ramifications that affect both of you. You should not let taxes drive your decisions, but it is prudent to seek professional advice from an accountant or a fee-only financial advisor before making decisions. Attorneys are not expected to analyze your divorce decisions for the tax impact, so it is up to you to seek professional tax advice. More than likely, the fee you pay these professionals will be more than offset by the savings their advice provides.

5. Ignoring Insurance

An often overlooked, but important consideration in divorce is insurance. As soon as your divorce is final, notify all of your insurance providers that you are divorced and no longer living together. Changes in address can affect your coverage. You may also need to apply for individual health insurance or pay COBRA rates. Finally, do not forget to change beneficiaries on life insurance policies if appropriate. Very often people forget to make life insurance beneficiary changes and mistakenly leave the first spouse as the beneficiary even after a second marriage. Be cautious of making changes during the divorce because you can violate court orders, so it’s best to seek advice from your attorney before making these changes.

BONUS

I know the title said five pitfalls, but this last one is so important that I will share it as a free bonus. It’s the most important and may also be the most difficult for you to implement. Although ending a relationship is emotionally hard, try to separate your emotions from the financial side of the divorce. Do not try to win, because there are no winners in a divorce. The harsh reality is that the financial side of the divorce needs to be a business decision. Unfortunately, it doesn’t matter who was at fault in the divorce or who is to blame. The more you are able to look at the finances as a business transaction, the smoother it will go and the better off you, your spouse and children will be.

About the author

Chuck Rylant, MBA, CFP®

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