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Negotiating a divorce settlement can be stressful, leaving room for the possibility of being cheated out of the money you rightfully deserve. However, you can take a few steps to avoid financial mistakes in a divorce settlement. Below are some common pitfalls to steer clear of:
List of Divorce Settlement Mistakes
While it may be easy to get a divorce without getting a lawyer or a mediator, the lack of legal representation can leave you struggling financially in the future. A good legal representation is a must. The only exception is if the couple doesn't have assets or debts or they agree to divide everything equally and skip the court. Some states all mail-in divorce or online divorce. But if there are children involved then getting a lawyer is highly advisable.
This is a common scenario among stay home spouses. They do not have a clear picture of all the assets and debts they co-own with their spouses. Usually, in this case, one spouse manages all the finances while the other takes care of the household and kids. The one who takes care of the household and kids is relying on the other spouse to make all assets and debs related issues. During the marriage, the spouse responsible for finances may have created hidden accounts to keep assets or taken several loans that the other spouse may not be aware of. In this case, the former might also be less savvy financially than the latter. While a judge will require both spouses to submit the data on their assets and liabilities, one of the spouses may choose to hide a few in a foreign account. They may also have created some hidden legal entity to hide the assets. Or you might get burdened with an unfair amount of debt. It is always a good idea to engage a certified divorce financial advisor/analyst (CDFA) to discover a full list of all the assets and debts.
Not understanding whether your state is a community property state or a separate property state can make you overestimate or underestimate what you are entitled to during a divorce settlement. You may end up making assumptions that can be financially devastating in the future.
Divorce can cause a lot of anxiety. Or you could be just sick and tired of your spouse. A natural reflex is to get over it as fast as you can. But a settlement reached in haste is always going to harm you financially. The process of putting together financial documents and negotiating the settlement can be time-consuming but worth it.
A good financial mediator can save you and your spouse a significant amount of legal fees and time by helping you reach an agreement on a fair settlement. Mediation costs only a fraction of the legal costs. However, some spouses may refuse to sit at the table and leave it all to their lawyer. While a mediator might be able to help both parties reach a settlement in a couple of weeks, lawyers arguing in court can extend the process by six months to a year.
You may decide to hire a lawyer who is combative so that your spouse can be punished. While it may give you some short-term satisfaction, it can cost you more in legal fees, settlement amounts, and time.
A combative attorney's interest in not looking out for you but increasing their billing. The case they might be able to finish in $10,000 may cost you $25,000 to $50,000, depending on how your spouse's attorney responds. It will also cost them more. If you have children, wouldn't you rather see these funds going into a college savings plan to fund their education or pay for their summer camps?
The flip side of a combative attorney is hiring one who is too passive. Such attorneys won't fight for your rights. Instead, they will reach a compromise with your spouse's attorney so that they can charge you a fixed fee and finish your case as soon as possible. They won't care if you get a good settlement or not.
If you feel that your attorney is too aggressive or passive then you need to find the one who is not.
If you are negotiating a settlement without consulting a financial advisor and you are not familiar with the IRS tax rules you may be in for a shock. Any assets sold during the divorce proceedings can be subject to state and federal income tax. The situation can get worse if spouses are not communicating at all. It will be in your best interest to work with a certified divorce financial advisor or analyst (CDFA) to understand any tax implications. Failure to pay taxes may force you to file for bankruptcy.
While in most states child support has to be approved by a judge, in some cases spouses mutually agree on an amount. While it may give the custodial parent an impression that they got a fair deal without tormenting their co-parent, down the road they might find themselves short of funds. It is important to have the right amount of child support as well as a commitment from the other spouse that they will contribute additional funds towards children's activities, classes, and medical bills. A good financial advisor can help you create the budget for child support.
Just like the child support, if the spouse is expected to get the maintenance money during and after the divorce then not preparing a detailed budget can hurt them financially. A financial advisor can help you create a budget for the same.
During the settlement negotiation process, a spouse may get several proposals. Some may sound too good to be true with hidden clauses. A clause could be if you do X, you will no longer get the spousal support or you will get the reduced child support. Failure to understand such clauses may set the spouse for financial failure.
Similarly, if a reasonable settlement is offered but the spouse goes on an ego trip that can be financially harmful too. Not only it will cost more in legal fees but also time. A judge may then decide on a settlement that may not be as friendly.
Both child and spousal support are going to be less valuable over time as inflation increases. Not being able to negotiate the support amount that will increase over time as inflation increases can be a financially fatal mistake.
One of the common mistakes that are made by divorcing spouses is that they tend to cling on to an asset that doesn't make any financial sense. It could be the primary home or a muscle car that was affordable only when it was a two-income household.
Similarly, a stay at home may want to keep the primary home even though she doesn't have the resources to pay for insurance, maintenance, mortgage, and taxes. Such decisions are not very practical in the long run and will eventually force the possessing party to sell the asset below the market.
If one of the spouses had bought an insurance policy with children as beneficiaries, then not making sure can that the spouse doesn't change the beneficiary to their new partner can leave the children short of money. Similarly, not being able to insurance the assets acquired during the settlement can leave you in financial limbo.
Several spouses just assume that since they have earned less or have been a stay-home spouse then the 401K and IRA accounts belong to their spouse. That is not true unless it was agreed upon in a prenup. The 401Ks and IRA accounts should be divided 50/50. However, beware that liquidating them can result in penalties and taxes. Similarly, if one spouse has worked and the other one did not, the social security will be shared by both.
During the divorce, some assets such as cars and homes will be divided among both spouses. Each spouse needs to make sure that the assets they are receiving have titles in their name and the other spouse no longer has any interest. Similarly, all bank accounts, credit cards, and loan accounts should be updated. The same goes for other legal documents such as a driver's license and passport.
Completely ignoring the financial planning and going on a spending spree just because you will get a big settlement check will make you poor soon. And adequate financial planning is a must. A good financial planner can help you design a diversified portfolio to maximize your financial growth. It is a must to have a flourishing future.
Sharing children's incidental expenses is very important. These expenses are in addition to what is covered by child support. During your divorce settlement sharing children's incidental expenses should be part of the final order. Cent helps co-parents manage children's shared expenses. You can make payments to your co-parent and track these expenses.
Related:
Decoupling Finances During Divorce
Surviving and Thriving Financially After Divorce
Co-parenting: Splitting expenses with your ex
Warning: This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.