Money Pitfalls to Avoid When Getting Divorced

By Chuck J. Rylant, CFP, MBA
Santa Maria, CA
www.cjrylantwealthmanagement.com

If you are going through a divorce, you may be feeling fear, anger, resentment, distrust, and a range of other emotions. These feelings can wreak havoc on your finances.

You will be making major financial decisions that will likely impact you for decades at a time when your emotions are clouding your judgment. Here are six common mistakes to watch out for during a divorce.

1. Choosing the wrong attorney
If you can end the relationship without a legal fight, you will begin your new life with far more money. Legal battles are very expensive. A good attorney can prevent you from making a major financial mistake, but be cautious because it’s easy to be taken advantage of during a divorce.

There are many ethical attorneys practicing family law, but there certainly are a few that take advantage of people when they are the most vulnerable. Because of the design of our legal system, attorneys may provoke fights between spouses, causing long drawn-out legal battles that can drain your assets. These stressful battles rack up fees that, if prevented, could have been used for retirement, education, or bills. Consult with several attorneys until you find one you are comfortable with and who is interested in resolving the divorce efficiently. More and more lawyers are gaining experience with collaborative divorce, where the spouses and all the professionals agree not to litigate. You do not want an attorney that will drag you and your spouse through an unnecessary battle.

2. Leaving debt in your spouse’s name
During your marriage you probably obtained credit that was also in your spouse’s name. It’s very important to pay off or refinance debt so it’s only in the name of the spouse who will be obligated to pay the debt. Often one partner takes responsibility for joint debt, which leaves the other at risk of negative credit ratings from late payments. Even if payments are made on time, the other spouse may be anxious about the situation, which can lead to unnecessary stress and arguments.

3. Staying in the house
Divorcing spouses often fight to the end to keep a house. Perhaps we want to maintain some stability in what feels otherwise like an out-of-control situation. The financial reality is that the income that formerly supported your family must now support two households. Keeping a home (especially one that was a stretch before the divorce) spreads the budget even thinner. More often than not, selling the home allows both parties to downsize until they are able to reestablish themselves. Sometimes we must take one step back to take two steps forward. Try not to go too far in loving the house. It can’t love you back.

4. Neglecting to consider the tax consequences
Divorce may force you to make the largest financial decisions of your life. You may need to sell or refinance your home. Your retirement accounts may be split or used for other expenses, and you may have alimony and child support obligations that last for years. These transactions can have huge tax ramifications that affect both of you. Don’t let taxes completely drive your decisions, but seek professional advice from an accountant or a fee-only financial advisor before you agree to a settlement.

Attorneys typically are not expected to analyze the tax aspects of your divorce decisions, so it is up to you to seek additional help. Most likely, the fee you pay these professionals will be more than offset by the savings their advice provides.

5. Ignoring insurance
An often overlooked but critical consideration in divorce is insurance. As soon as your divorce is final, notify all of your insurance providers that you are divorced and no longer living with your spouse. Changes in address can affect your coverage. You may also need to apply for individual health insurance or pay for costly COBRA coverage. Finally, do not forget to change beneficiaries on any life insurance policies and on annuity and retirement accounts like 401(k)s and IRAs. Very often people forget to make necessary changes and mistakenly leave the first spouse as the beneficiary even after a second marriage. But be cautious of making changes during the divorce proceedings because you can violate court orders, so it’s always best to seek advice from your attorney first.

6. Trying too hard to win
The final pitfall is the most dangerous and may be the most difficult for you to avoid. Although ending a relationship is tough emotionally, try to separate your feelings from the financial side of the divorce. Do not try to win because there are no winners in a divorce. The harsh reality is that the financial side of the divorce needs to be a business decision. Unfortunately, it doesn’t matter who was at fault in the divorce or who is to blame. The more you are able to look at the finances as a business transaction, the smoother it will go and the better off you, your former spouse, and your children will be in the long run.