Going through a divorce is tough enough, not to mention emotionally and financially draining. During this tumultuous period, people often make mistakes that can have long-lasting effects on their financial well-being. Understanding these mistakes and what causes them is crucial to help one safeguard their financial future and best prepare for the next chapter in their lives.
Here are 13 common financial mistakes people can make during divorce proceedings and why they happen — plus tips on how to avoid them.
1. Not Understanding the Financial Situation
During a marriage, it’s not uncommon for one partner to handle all the finances while the other remains blissfully unaware of their financial picture. This can lead to clashes or uninformed decisions during the divorce process. To avoid this, both parties should have a complete understanding of all assets, debts, income, and expenses.
2. Overlooking Tax Implications
Decisions made during a divorce can have significant tax consequences, including how alimony payments, retirement accounts, and property taxes will be divided. As such, it’s always advisable to consult with a reliable tax professional to understand potential tax implications and avoid being hit with hefty tax bills.
3. Ignoring Long-Term Financial Security for Short-Term Gains
Opting for a lump-cash settlement without considering long-term financial needs can jeopardize your future financial security. For example, choosing to keep the family home without assessing the ability to afford its ongoing maintenance, property taxes, and mortgage payments can lead to financial strain down the road.
4. Forgetting To Consider Health Insurance
Losing health coverage is another commonly overlooked consequence of divorce — especially if you’re unemployed or used to get insurance through your ex-spouse’s job. It’s crucial to explore your health insurance options, including COBRA or private insurance plans, to avoid any gaps in insurance.
Related: 5 Cheapest Ways To See a Doctor Without Insurance
5. Not Splitting Retirement Accounts Properly
Dividing retirement accounts can be a complicated process and requires a basic understanding of each type of account. Since 401(k) and Roth IRA accounts can have different rules regarding withdrawals, it’s important to use the correct procedures to avoid unnecessary taxes and penalties. A Qualified Domestic Relations Order (QDRO) may be necessary to divide certain retirement plans without incurring these costs.
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6. Underestimating the Cost of Divorce
With the average cost of a divorce ranging from $15,000 to $20,000 in the U.S., expenses like legal and court fees can quickly add up. Not planning for these costs can lead to significant financial strain. To avoid this scenario, consider creating a budget or setting aside funds to help with the expenses. Another option is using mediation services as an alternative to traditional litigation.
Related: The Most Expensive Celebrity Divorces of All Time
7. Allowing Emotions To Drive Financial Decisions
During divorce proceedings, decisions driven by anger, guilt, or sadness can lead to poor outcomes that can affect your financial health for years to come. These emotions can cloud judgment and push individuals to make hasty decisions just to find immediate relief or to hurt the other party, rather than focusing on their own long-term financial well-being.
These mistakes can result in impacts to your credit score, insufficient retirement funds, or ongoing legal battles. To avoid making rash decisions, consult with a professional advisor or attorney for guidance, support, and clarity on financial jargon.
8. Not Updating Estate Plans and Beneficiaries
Failing to update wills, trusts, and beneficiary information on retirement accounts and insurance policies can result in unintended consequences, like the continued distribution of assets to ex-spouses or other unintended beneficiaries. As such, it’s vital to review and update these documents as soon as possible post-divorce.
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9. Overlooking Joint Debts
If your ex-spouse had, say, a gambling problem, you may still be responsible for their debt, even if you weren’t the one who incurred it (crazy, we know). To avoid being on the hook for your ex’s financial woes, make sure that all joint debts are addressed in the divorce settlement to prevent future financial disputes and other unwelcome surprises.
10. Failing To Secure Alimony and Child Support
Without proper documentation, securing alimony or child support payments can be challenging if the other party becomes unwilling or unable to pay. To avoid this issue, be sure to ask your attorney for a legally-binding agreement or court order that specifies the amount, duration, and terms of payment. This can help ensure the payments are met and enforced in the long-term.
11. Neglecting To Assess the Liquidity of Assets
Receiving property assets or land in a divorce can be tricky if you’re in a pinch for money. Since these kinds of assets can’t be quickly turned into cash without first being sold, this can take time — and you might not always get the price you expect. It’d be wise to do research on the property’s value and balance long-term assets with cash or items that can be quickly sold for immediate funds.
12. DIY Divorce Without Understanding the Implications
While a DIY divorce may seem cost-effective, it can lead to oversights and costly mistakes — especially in complex financial situations where kids or assets are involved. Seeking advice from professionals, including attorneys and financial advisors, can prevent these errors. Some lawyers may also offer a lower cost for consultation, or provide services on a sliding scale based on one’s income.
13. Rushing Into a New Relationship Too Soon
Jumping back into the dating scene immediately after a divorce can lead to emotional and financial complications. While people often seek companionship to fill the void left by their separation, they may not be emotionally ready to make sound decisions. This haste can cloud judgment and lead to unsustainable financial choices, such as extravagant spending on dates and vacations.
To avoid this mistake, consider taking some time to heal and fully understand your new financial situation following a divorce.
