Even in the most amicable divorce cases, the process can be difficult and burdensome for everyone involved. It’s not secret that sometimes, divorce can ruin you financially. People are often unable to rationally consider an event’s financial repercussions because they are overwhelmed by the intensity of their feelings. Therefore, many individuals make poor financial decisions that have long-lasting consequences.
You and your ex probably had joint accounts and shared financial responsibilities during your marriage. These are good habits in a marriage, but if you’re considering divorce, you’ll need to look at your finances and make some tough decisions. People don’t realize how complicated such issues are or how vital smart decisions can be under these circumstances. Doing your research, taking time, thinking responsibly, and planning ahead are the best ways to organize your divorce finances.
Therefore, to help you avoid falling into the same traps here is a compiled list of people’s most common financial mistakes during a divorce. The items on this list may help ease your mind, but they are not a substitute for the guidance of an expert who can evaluate your specific situation.
Here are 6 Ways to Avoid Making Financial Mistakes During Your Divorce
Trying to Rush Through the Divorce Process
When a marriage ends in divorce, many want the former partner out of their lives as soon as possible. This holds especially true in physical, emotional, or financial abuse cases. A hasty divorce is problematic because it can cause an unfair distribution of property, which usually affects the weaker spouse. One person can take advantage of the other’s haste to end the relationship by convincing them to part ways with much less than they deserve and without the resources, they need to start over.
When two people get married, their financial lives become entangled in a way that can be difficult to untangle from a legal and practical perspective. After taking all necessary precautions, it’s time to enlist expert assistance in finding and valuing your assets and debts.
Losing Track of Joint Debts
Consumers often overlook the potential risks associated with joint credit accounts. If you and your spouse have taken out any joint loans or credit cards while married, then the responsibility for paying off those debts falls equally on both of you. Although your divorce settlement may stipulate that your ex-spouse is responsible for paying off all joint debts, lenders will not waive your share of the bill. If they don’t, creditors may still try to collect from you, and you may see a drop in your credit score. One of the best options to pay off your debt and save money simultaneously is to settle your debt by negotiating a debt settlement with your creditors. Before finalizing a divorce, it’s wise to pay off all joint debts so that each person can start over after the separation.
Not Valuing Your Marital Assets Correctly
Multiple approaches may be taken when determining the worth of a complex asset like a business. To ensure a fair division of major assets, each spouse should get their own independent valuation. An impartial third party, such as a mediator, arbitrator, or judge, can compare the two estimates and rule on whether or not they are fair.
In order to calculate each partner’s share, it may be necessary to determine how much an asset’s value changed after the marriage, such as a house one partner bought before marriage. If you get a house or other asset that requires constant upkeep, the divorce agreement may need to account for those costs.
Ignoring Hidden Assets
Spouses may try to keep more marital assets than they should by using trusts, foreign accounts, and less efficient means, such as transferring assets to trusted family or friends. If you want to make sure you don’t lose any of your rightful assets in the divorce, appointing a forensic accountant or an attorney who finds hidden assets can be a big help.
A lawyer can also assist you in obtaining a court order compelling your spouse to disclose their financial information and assets. Also, lawyers can make banks hand over account information if you and your lawyer have identified them as likely repositories of your spouse’s hidden wealth.
Not Handling Retirement Funds Properly
While it’s true that married couples can have separate retirement accounts (which cannot be owned jointly), the amounts in each account can vary widely. With the help of a qualified domestic relations order (QDRO) in place, a divorced couple can divide their retirement assets without worrying about early withdrawal penalties if either party receives their share of the settlement before reaching age 59 and a half.
It would be unfair for each partner to leave the marriage with their own retirement accounts if one partner has been the primary breadwinner and has amassed significant amounts in a 401(k) plan through work while the other has raised the children full time. A spousal IRA would have been the only option for retirement savings for the non-working spouse or partner (IRA). IRAs have comparatively lower annual contribution limits than 401(k)s, so the working spouse may have more retirement assets if a spousal IRA exists.
Disregarding the Effect of Tax Obligations and Penalties
Consider several tax implications when going through a divorce, including spousal support and retirement account withdrawals. You might have to pay taxes on the marital assets you get as part of the settlement.
When withdrawing money from a retirement account, you need to factor in applicable taxes and early withdrawal penalties. Instead of alimony, a lump sum allocation may be preferable, so neither party has to worry about paying or collecting additional taxes. Managing one’s tax obligations is a tricky and nuanced process. Before settling on a property division, it is wise to get advice from a tax expert.
It is clear that there is a great deal to think about during a divorce, and it is easy to see how it could become overwhelming. But if you take the time to inform yourself and weigh all the relevant factors in light of your present situation and your hopes and dreams for the future, you can steer clear of these common financial blunders during a divorce. If you want the best results, you must act logically and think about consulting with qualified financial professionals you can trust.