Avoid these common financial mistakes made when getting a divorce. Lee Slater, MBA, CFP, CDFA (Certified Divorce Financial Analyst), explains divorce pitfalls and how to avoid them. Mr. Slater’s views on the following issues come from years of professional experience and his personal experience from his own divorce.
In his 2007 article, “Fifteen Critical Financial Mistakes in Divorce” at DivorceAndFinance.org, Slater explains what many people do wrong during divorce. Mr. Slater is based in New York, and while there are similar issues in every divorce, each state has different divorce laws.
That is why it is important for each husband or wife to talk to his or her own divorce lawyer. And, because finances are different in each marriage, people should learn about their best options from a trained financial planner.
Here are some things to avoid when getting a divorce.
Failing to Take Action and Becoming a Financial Victim
If a husband or wife suspects his or her spouse of planning a divorce, it is time to take action. The best move is to get a handle on the financial situation and make copies of all important financial documents.
Make copies of all important financial records, like these:
- Statements of savings accounts and checking accounts (all bank accounts, including personal and business)
- Account statements from a stock broker (some accounts can be accessed online, some may be retirement accounts, like a 401k or an IRA).
- Account statements from real estate partnerships
- Credit card statements
- Tax returns
If a husband or wife believes that the spouse may liquidate (sell) or change the title on marital assets (such as the house), notify the holder in writing and get a restraining order from the court.
Hire a professional. It’s worth getting a lawyer or financial planner to explain what documents should be copied and how to get a restraining order.
Monitor cash and withdrawals in:
- Joint checking accounts
- Brokerage accounts
- Cash values of life insurance
Letting Emotions Take Over and Punishing Spouse
According to Slater, getting a combative lawyer is the wrong thing to do. Letting one’s emotions take over can be very expensive at a time when money will be tight. Don’t hire an adversarial and combative lawyer to punish a spouse and "make him (her) pay", because it will not change the outcome of the settlement, except in this one way: There will be less money to divide up after paying off the high lawyer bills.
Also, don’t become overly attached to things like the house or something purchased while married. This behavior will cause a divorcing husband or wife to make irrational decisions, and decisions made during divorce will affect one's quality of life later on.
Ignoring Tax Consequences
Do not ignore tax consequences. Work with a divorce financial planner or tax accountant to minimize taxes for both spouses. Look at a proposed divorce settlement with a professional to see what the tax consequences of a 50/50 settlement would be. Often, the impact of taxes on assets is overlooked, but regretted later.
Underestimating Living Expenses, Resulting in an Inaccurate Budget
Without a financial planner, it is very easy to use unrealistically low living expenses, or leave out important info, like:
- Tax responsibilities
- Costs of future house repairs
- Inflation
This results in an inaccurate budget, and paints a rosy, but unrealistic, expectation of life after divorce.
Running Up Big Legal Bills by Using Lawyers Instead of Other Professionals
Don’t run up big legal fees. One of the easiest ways to run up big bills is to use a divorce lawyer as a therapist or financial planner. Don’t do this because, at $200-$450 an hour, it’s just too expensive to use a lawyer as anything other than a legal consultant.
- For emotional stress, talk to a therapist.
- For financial analysis, a divorce financial planner is usually less expensive than an attorney.
Divorce is often traumatic, but it’s important not to become passive or overly emotional, because the divorce settlement cannot be changed later.
Avoid these financial mistakes when getting a divorce and have more money for life after divorce. Lee Slater, Certified Divorce Financial Analyst, believes that some of the common pitfalls, such as becoming a financial victim, ignoring tax consequences, and underestimating expenses, can have terrible long term consequences which can often be avoided.
Information from this article is not intended to be a substitute for advice from a lawyer, financial planner, therapist, or other professional. Please consult a lawyer, financial planner, or other professional for specific advice.
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Christina Gregoire - Christina Gregoire writes about divorce, fashion, and baby boomers. Her forte is explaining complex ideas in simple language.
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