7 Divorce Settlement Mistakes You Can Avoid
by Donna Cates, CDFA®, CRPC®
Navigating a divorce can feel like an overwhelming whirlwind of emotions and decisions. As you contemplate your divorce settlement, it's crucial to remember that each choice you make now can have lasting impacts on your financial future. I understand how tempting it might be to simply sign on the dotted line and move forward, but rushing through this process could lead to significant financial challenges down the road. That's why I'm here to offer guidance and support as you consider the seven most common and costly mistakes made during divorce settlements.
### Mistake #1: Not Knowing the Liquidity of Assets
Picture this: one party receives the family home, while the other gets retirement accounts and brokerage funds. On the surface, it may seem fair. However, the devil is in the details. How will the one keeping the home cover expenses if their major asset is tied up in property? Understanding the liquidity of assets is crucial. You may think all is well until bills pile up, and the reality of limited cash flow sets in. This is where a professional's guidance can make all the difference.
**Example:** Consider Susan, who kept the family home after her divorce. The home was her largest asset, but it was mostly illiquid. She struggled to pay the bills and maintain the property. Eventually, she had to sell at a loss just to make ends meet. If Susan had known about the importance of liquidity, she might have negotiated for more liquid assets to support her ongoing expenses.
### Mistake #2: Failure to Consider the Impact of Taxes
Taxes can be a minefield during divorce settlements. Capital gains, income tax, and alimony all come into play. It's essential to look beyond the surface value of assets. For instance, you might be offered an investment account with a sizable value, but be unaware of the looming tax liabilities. Let's not forget the nuances of filing status after divorce. These decisions could significantly impact your financial well-being.
**Example:** Imagine Sarah, who received a sizeable investment account in her divorce settlement. She thought she was getting a great deal until tax season arrived. The account had substantial capital gains, leaving her with a hefty tax bill she hadn't anticipated. If Sarah had understood the tax implications beforehand, she could have made a more informed decision about her assets.
### Mistake #3: Not Understanding the Rules of Retirement Accounts
Retirement accounts are often substantial assets in a divorce settlement, yet they come with their own set of rules and tax implications. Knowing how to handle these accounts can save you from hefty penalties and unexpected tax bills. For example, a Qualified Domestic Relations Order (QDRO) is crucial when transferring retirement assets, avoiding unnecessary tax hits.
**Example:** Let's take Mark and Emily, who were dividing Mark's 401(k) in their divorce. Emily was awarded a portion of the account, but without a QDRO, she faced a 20% tax withholding when trying to transfer the funds. This unexpected hit could have been avoided with proper knowledge of the rules surrounding retirement account transfers.
### Mistake #4: Overlooking Debt and Credit Rating Issues
Starting anew with bad credit is a challenging road. Joint accounts and shared debts can haunt you post-divorce if not addressed. Taking proactive steps to close joint accounts and establish your own financial footing is vital. Remember, creditors are not bound by your divorce agreement; they want their money regardless of your marital status.
**Example:** John and Lisa had several joint credit cards during their marriage. Lisa assumed John would handle closing the accounts after the divorce, but he neglected to do so. Months later, Lisa's credit score took a hit when John missed payments on their joint accounts. If Lisa had been proactive about closing these accounts, she could have avoided the negative impact on her credit.
### Mistake #5: Not Maintaining Control over Insurance Policies
Life insurance policies tied to alimony or child support need careful attention. Ensure you are either the owner or irrevocable beneficiary of these policies to prevent potential financial catastrophe. Losing track of these policies could leave you vulnerable at a time when stability is paramount.
**Example:** Rachel's ex-husband was supposed to maintain a life insurance policy with her as the beneficiary to secure child support payments. Years later, Rachel found out he had canceled the policy, leaving her without the financial safety net she had relied on. If Rachel had maintained control over the policy or been the owner, she could have prevented this situation.
### Mistake #6: Failure to Budget Before the Divorce Settlement
Transitioning to a new financial reality post-divorce requires careful planning. Many find themselves in financial distress after keeping the family home without considering the ongoing costs. A clear budgeting strategy, guided by a professional, can help you make informed decisions about your financial future.
**Example:** Michaela was determined to keep the family home for her children after the divorce. However, she didn't realize the extent of the ongoing expenses such as property taxes and maintenance. Within a year, Michaela was struggling to make ends meet. If she had budgeted and planned ahead, she might have chosen a more sustainable living arrangement.
### Mistake #7: Failure to Identify Hidden Assets
While it's uncomfortable to think about, hidden assets are a reality in some divorces. Trust is essential, but being aware of potential red flags is equally important. Financial professionals can assist in uncovering any hidden assets, protecting your rightful share of the settlement.
**Example:** Maria suspected her ex-husband was hiding assets during their divorce. With the help of a forensic accountant, she discovered undisclosed accounts and undeclared income. Without this discovery, Maria would have settled for far less than she was entitled to. Seeking professional help allowed her to uncover the hidden assets and secure a fair settlement.
In conclusion, divorce is more than just a legal process; it's a financial one with long-term implications. I urge you not to settle until you've fully grasped the impact on your financial future. Whether you're facing these challenges now or want to prepare for the road ahead, reaching out for professional guidance is a proactive step toward financial empowerment.
Remember, you are not alone in this journey. Donna Cates, Certified Divorce Financial Analyst (CDFA) and Financial Advisor and her team are here to provide the knowledge, support, and compassion needed to navigate these complex financial waters. Your future financial well-being is worth the investment of time and care now. Don't hesitate to reach out and take control of your financial future today.
This content was generated with AI assistance. While we strive for accuracy, AI may not capture all current laws and market conditions. This information is for informational purposes only and should not be considered personalized financial advice. Always consult a licensed financial advisor for decisions tailored to your unique situation and goals. AI is used to enhance insights, not replace professional guidance.