Divorce is one of the most stressful life events. Even the most amicable splits can be complicated and emotionally draining. We likely all know couples who have gone through divorce, and it can be a trying time for everyone involved. It is also a time when financial decisions are made that can impact spouses and children for years to come. With all that can be on the minds of those going through divorce, it's important to attempt to manage costly missteps.
Having helped clients who have divorced, we've compiled the following list of financial missteps we've seen people make. Please share this with anyone you know who might benefit from our insights.
Mistake #1: Not Asking for Help Early in the Process
After deciding to get a divorce, the first person a spouse typically calls is a lawyer. This may be the most appropriate first step, but other actions may need to occur simultaneously. While you may need a lawyer at some point, divorce finances can be more stressful in the early stages than in the legal stages.
Since part of splitting up your partnership involves assets, you might want to consider contacting a financial professional. A financial professional can help you organize your household by listing out all your assets and debts and assisting you in valuing those assets.
At the same time, you might want to consider contacting support groups that work with individuals or couples going through divorce. Asking for help early in the process may help you manage feelings of depression, isolation, and low self-esteem.
Mistake #2: Not Making the Right Move with the House
People often make mistakes when deciding what to do with their houses after divorce. Since a house is likely among your largest assets, evaluating all your options is critical.
Some people look to sell their houses too quickly—sometimes even before arrangements are settled. One spouse may try to convince the other to go along with selling the house and splitting the proceeds 50/50. But remember once the sale is done, there may be no going back. If there is equity in the house, developing a strategy before its sale can be critical.
Sometimes, there's a grieving process involved in relinquishing a home. One or both spouses may have emotional attachments to the house or want to keep it for their children. One spouse may be willing to give up other assets to keep the property. Many factors need to be considered here, so make sure you are comfortable with any decision you make regarding your home.
Mistake #3: Underestimating Your Post-Divorce Finances
Maintaining two households can be more expensive than maintaining one, and some people underestimate their post-divorce living expenses. You need to develop a solid, realistic budget before negotiating fair agreements about other items.
Mistake #4: Not Understanding That Everything Is Negotiable
In a divorce, consider putting everything on the table. Before agreeing to terms, negotiate issues like paying for the children's college, their cars, or other items that may not typically be included in a divorce agreement. When negotiating, one strategy is to start with the highest-value assets and then work your way down.
Mistake #5: Not Considering Life Insurance to Cover Alimony
If one spouse is supposed to receive alimony, child support, or some other form of financial payment after a divorce, the agreement may need to include a life insurance policy to cover the cost of alimony if the paying spouse dies.
Remember: several factors affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also face surrender charges and income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Mistake #6: Ignoring Tax Consequences
There can be tax consequences for divorce, including property division and tax rules about taxes and alimony payments. If you receive an asset as part of a settlement and later need to sell it, you should understand whether a capital gain or loss might apply. Many couples consider liquidating investments, such as retirement accounts, but this may involve tax penalties.
Keep in mind that this article is for informational purposes only and is not intended as a replacement for real-life advice. You may want to consult with legal and tax professionals before agreeing to any divorce terms.
Mistake #7: Failing to Anticipate Debt Problems
Along with dividing up your marital assets, you may need to divide up certain debts. Your divorce agreement should be specific about which spouse is responsible for what debt and clear about what will happen if the Internal Revenue Service imposes any penalties, interest, or taxes.
Mistake #8: Not Knowing Logins
You should ensure that you can log into all of your accounts by knowing your usernames and passwords. You should have this information for financial and other accounts, including your utility, mortgage, cable, and car insurance accounts. At some point, you'll have separate logins. But it can be a good idea to know what's happening with joint accounts during the divorce process.
Mistake #9: Forgetting to Change Beneficiaries
After divorce, people can forget to change their beneficiaries on their work benefits and other accounts. You may want to consider appropriate updates. Also, you should create new wills, trust documents, and powers of attorney that more accurately reflect your current situation.
Mistake #10: Not Considering Hiring a Divorce Advocate
In some cases, hiring a divorce advocate can be helpful. They can talk you through some of the aspects of divorce, from developing co-parenting plans to hiring a private investigator. A divorce advocate can also help you prepare and organize all the documents you need to be better prepared when you walk into the lawyer's office.
Ask for Help
Divorce ranks as the second-most stressful life event, so asking for help can provide valuable comfort and guidance through this challenging period. So don't go it alone—leverage the expertise of professionals and other specialists. It may pay dividends for years to come.1
1 Forbes.com, 2023