Divorce can be costly in many ways. It often leaves you emotionally depleted and physically exhausted – and can be financially devastating. Here are nine of the biggest mistakes we’ve seen over the years to help you navigate your finances and divorce so you can avoid financial landmines.
1. Know your starting point. If you are unclear about your family finances, the time to gain clarity is before you file for divorce. It is much easier to get bank statements, tax returns, and retirement account statements while you are in the marital home. Knowing what you have, what you owe, and having a realistic idea of your monthly spending before you file for divorce can save you a lot of time and money. It is equally important to figure out what you don’t have access to or what you don’t know.
2. Letting emotions run the show. As difficult as it is to separate emotion from the divorce process, don’t make important financial decisions from a place of emotion. This is especially relevant to discussions around the marital home. If you have completed an accurate budget and have a handle on your family finances, you can use this information to realistically determine if you or your spouse can comfortably afford to stay in the marital home.
3. Equitable does not mean equal. A retirement account worth one hundred thousand dollars is not the same as one hundred thousand dollars in equity in the marital home. Retirement fund distributions are taxable and subject to withdrawal penalty if you are younger than 59 ½. Equity in the marital home is not easily accessed – you can’t sell your guest bath to pay bills if you are in a pinch. Make sure to understand the tax implications and the liquidity of the assets you are dividing.
4. Look at the whole financial picture, not each asset or debt category separately. To understand what your financial future will look like it is important to know what you will owe or have access to immediately, what your cash flow will look like in retirement, and what you have available for emergencies as they arise. If you are unsure about anything in your financial settlement, seek expert financial advice BEFORE you sign the agreement.
5. Know the difference between liability and responsibility. If your marital settlement agreement states that your spouse is responsible for all payments to a balance owed on a joint credit card, what happens if they don’t make those payments? The answer is that the credit card company will seek payment from both of you. While the court can enforce what was in the marital settlement agreement, the credit card company will still hold both parties liable and will report to both parties’ credit.
6. Complete the QDRO, file it with the court, and send it to the plan. If the marital settlement agreement states that husband gets one hundred thousand dollars from wife’s 401k, a Qualified Domestic Relations Order (QDRO) must be drafted, filed with the courts and ordered, and then sent to the retirement plan in order for husband to receive his funds. If any step of this process is not completed, then the transfer does not occur.
7. Undervaluing or not valuing Defined Benefit Plans. Pensions do not send statements that state their value like a 401k or 403b does. A pension will typically describe the plan, how it is credited or how many credits a participant has, when a participant is vested, or what the defined benefit at retirement age will be. To truly understand the current value of a defined benefit, or pension plan, it needs to be valued by a professional.
8. Insure your cash flow. Especially if you have young children or are fully reliant on spousal maintenance or child support, it is vital to insure that income. If a person dies, so does any child support or maintenance you are receiving from them. Term life insurance policies are typically inexpensive and can be tailored to insure whatever amount is needed. Ideally, you should own the policy on your ex-spouse and be the beneficiary. This allows you to insure that premiums are being paid and does not allow your ex-spouse to change the beneficiary.
9. Going to court or hiring an attorney to punish your spouse. No matter how much of a jerk your ex is, a court is probably not going to give you 100% of everything just to crush your spouse. That’s not how it works. Divorce law is generally going to protect the interests and rights of both spouses, and the children involved. Meet with more than one attorney and choose the one that you fit with best. Consider Mediation as an alternative – it can cost you far less than a traditional divorce and allow you to create a path forward that works for your family.
Every divorce is different. What works for one person or family may not work as well for another. Do your homework, make sure you understand your financials and what you are agreeing to, and don’t be afraid to create an agreement that may be a little outside the box if it works for your family.