8 Financial Mistakes You Must Avoid When Going through a Divorce


Money is the underlying cause behind complicating divorce cases, leading couples to make several financial mistakes that cost them dearly. Financial decisions in the divorce process are convoluted and often painted with harsh emotions of pain, resentment, and frustration.

A divorce is an emotionally harrowing experience that can leave you making financial decisions that can haunt you later. Therefore, it is critical to be aware of these blunders that can pose a threat to your financial security.

Here are eight common financial mistakes couples make when negotiating a divorce settlement and simple tips on how you can avoid them.

1) Not Considering the Long-Term Implications of the Divorce Settlement

The immediate psychological and emotional impact of a divorce can be crushing, causing couples to make poor financial decisions with the objective of settling the matter as early as possible. Though a settlement may seem to be fair, it is wise to consider its long-term implications before agreeing to the terms.

For instance, an equal split of the marital assets such as the house, stocks, and jewelry may seem to be a fair choice. However, if not evaluated properly, these may prove to be a liability in the future.

For instance, if you are keeping the house, remember that it is a major cash expense (mortgage payments, property taxes, maintenance and repairs, and utility costs), proving to be a burden in the long term.

Evaluate the proposed settlement by gauging its impact on your finances. Consider its effect on assets, incomes, living expenses, inflation, spouse support, taxes, retirement plans, investments, medical expenses and health insurance costs, and child-related expenses such as education.

Ignoring these aspects will cause you to underestimate your future needs, adversely affecting your quality of life. Thus, it is wise to involve an expert divorce attorney and financial advisor who specialize in reviewing the divorce settlement realistically.

2) Thinking That Equal Division of Assets Is Fair

The value of marital assets is, by no means, defined by or limited to their current market value. For instance, if a house generates income through rent, it may be worth more than the market value. In this case, equal distribution of the property’s monetary value doesn’t mean that each partner will receive an equal share in the coming years. Look at the comprehensive picture and consider factors like taxes, capital gains, investment losses, timing issues, and inflation before dividing such assets.

Furthermore, every state in the US has its own laws concerning the financial settlement and distribution of marital property. For instance, the Illinois law recognizes a fair distribution of property as opposed to the equal division of property in states like California. Thus, if you live in Wheaton, IL, a qualified Wheaton divorce attorney can offer you the right information and represent you in court during the divorce process.

3) Failing to Consider Marital Debts

When getting divorced, you should consider dividing not only the marital assets but also the marital debts. This will prevent the risk of one spouse having to pay most of the marital liabilities.

More often than not, couples forget about the implications of shared credit. Lenders and credit card companies will hold you both responsible for defaulting on the payment, significantly affecting your credit score. Regardless of which spouse used his/her credit card, a debt incurred during your marriage years is a shared liability that must be jointly paid off by you and your partner. Therefore, before finalizing your divorce, consider paying off all your debts.

4) Not Securing the Alimony or Child-Support Payments with Insurance

If you are going to receive alimony and/or child support payments, you should consider securing them with an insurance policy. The death or the disability of your ex-partner may cause this income to stop.

Therefore, it is wise to request your spouse to invest in life insurance and disability policies (or modify the current policies), thereby protecting your rights and ensuring that these payments continue despite unexpected losses or injuries.

In case your spouse is reluctant to make this investment, you can offer to set up a divorce agreement that diverts a part of your alimony or child-support payment towards paying for this coverage.

5) Trying to Hide Assets

More often than not, spouses use trust, donations, and even cryptocurrencies like Bitcoin to hide their money. However, divorce lawyers are experts in this field and with the help of the modern digital technology, they can unveil the truth in no time.

Hiding assets in a divorce are illegal. Avoid squirreling away money or assets during the divorce process. You can deceive your spouse and even hide facts from your lawyer; however, messing with the law will severely affect your credibility in court, attract heavy penalties, and give your spouse an advantage in the divorce proceedings. Thus, it is best to declare all assets upfront, facilitating a speedy and fair divorce settlement.

6) Disregarding Tax Implications

Both, you and your spouse are liable to pay taxes on the spousal support and marital assets received after the divorce settlement.

For instance, once the judge awards you alimony, the Internal Revenue Service (IRS) considers that amount to be a taxable income, whereas your spouse can write it off as a tax deduction. Likewise, if you agree to an equal division of property and investments, one of you may end up paying more taxes than the other. Consult an expert divorce attorney and a certified divorce financial analyst to understand the tax implications of any proposed property division and alimony.

Retirement accounts can be tricky as they carry more tax rules than any other assets. Make sure your divorce agreement includes Qualified Domestic Relations Order (QDRO) that recognizes an alternate payee who will also benefit from the retirement savings.

7) Not Consulting Experts for Divorce Settlement Process

Divorce is a complicated legal process, which can be full of unpleasant surprises. Moreover, the stress during this period can force you to take emotional decisions which may not be in your best interest.

Apart from expert legal advice, you will require psychological, financial, and career guidance during this trying period. Make sure not to battle through this tough time all by yourself. Talk to the right professionals like a licensed psychologist, a financial planner, a tax consultant, and/or a career-guidance expert in order to make informed decisions and secure your future.

8) Not Considering Arbitration

Litigation is a lengthy and an expensive endeavor. Moreover, judges are highly inflexible and dictate the terms of your divorce settlement, which may or may not work in your favor.

Mediation or arbitration is not only cheaper but fairer for both the parties involved. Moreover, three to four sessions of mediation will help you identify your partner’s expectations, thereby enabling you to come to an agreement that’s mutually fair.

On the other hand, if the arbitration isn’t working and you decide to go ahead with the litigation process, you will be able to give clear instructions to your attorney as you are aware of your and your partner’s expectations, allowing faster settlement.

Take Home Message

Without a doubt, divorces are tortuous – legally, emotionally, and financially! In an attempt to get over with the distressing episode, you may make poor hasty decisions that may badly affect your financial security.

Use the information shared in this article to understand and avoid the common financial mistakes made by divorcing couples.