Financial Mistakes to Avoid

Financial Mistakes to Avoid

Divorce is a gut-wrenching experience. Whether you have been blindsided by infidelity or had to give an “I still love you, but I’m not in love with you anymore” speech to the person who you thought would be your partner for life, the grief can be profound. And you’re somehow supposed to pull it together through paralyzing pain and heart-pounding rage and make important financial decisions that may affect the rest of your life.

One of the best ways to regain your sense of self, besides therapy (seriously), is to minimize the financial damage of a divorce and put yourself in the best possible position to start over. Here are a few mistakes that you’ll want to avoid during this time when it’s hard to think clearly.

  1. Rushing the Process to Get It Over With

Many divorcing couples want their soon-to-be-ex out of their lives as quickly as possible. This is especially true when physical, emotional, or financial abuse is involved. The problem with a rushed divorce is that it can lead to an unfair division of property for the more vulnerable spouse. One party may take advantage of the other party’s desire to get things over with and convince them to leave the relationship with less than they deserve and without the support that they need to start over.

Marriage creates a complex legal and logistical intermingling of assets that can be difficult to sort out. After ensuring your safety, it’s important to go through the proper steps to locate and properly value all of your assets and debts with professional help.

  1. Refusing to Try Mediation

Mediation is a type of alternative dispute resolution that divorcing couples can use to avoid the time, expense, and stress of litigating a divorce in court. These processes also allow each spouse to retain more control over outcomes and keep family matters private, instead of leaving matters up to a judge and allowing divorce details to enter public court records.

  1. Misvaluing Marital Assets

Property can be valued in different ways, especially when it’s a complex asset like a business. That’s why each spouse should obtain their own independent valuation of major assets to make sure that they are divided fairly. A mediator, an arbitrator, or a judge can look at both valuations and help ensure a fair division.

It also may be necessary to untangle how much of an asset’s change in value occurred after the marriage—for example, in the case of a house that one partner purchased before marriage—to calculate the sum to which each partner is entitled. Also, keep in mind that if you get an asset that requires ongoing maintenance, such as a house, it may be appropriate to factor those additional costs into the divorce agreement.

  1. Not Considering the Possibility of Hidden Assets 

Through trusts, overseas accounts, and less sophisticated methods, such as transferring assets to trusted family members or friends, spouses may attempt to keep more than their fair share of marital assets in a divorce. Hiring a forensic accountant or an attorney who specializes in finding hidden assets can help you make sure that you don’t lose anything you are entitled to in your divorce.

An attorney can also help you get a court order requiring your spouse to produce documents or answer about their assets. And financial institutions can be required to produce records of a spouse’s account—if you and your attorney can figure out which financial institutions might be holding your spouse’s hidden assets.

  1. Being Saddled with an Unfair Share of Marital Debts

Just as uncovering and properly valuing all marital assets is important, it’s also important to know about all marital debts. Ordering and reviewing copies of each spouse’s credit reports from all three major credit bureaus can help uncover hidden consumer debts, such as credit card, auto, student loan, personal loan, and mortgage debt. Identifying hidden business liabilities—such as bad debts and pending lawsuits—is more challenging but also important.

Responsibility and liability can vary by state because some states are community property states, while others are equitable distribution states. In many cases, creditors can come after one spouse for another spouse’s unpaid joint debts—such as a credit card taken out in both spouses’ names—even if the other spouse had no idea that the debt existed. It’s important to uncover these problems and, whenever possible, pay off all debts or refinance them so that they become the sole responsibility of one spouse going forward.

  1. Not Getting Your Fair Share of Retirement Assets

While spouses may each have their own retirement accounts during marriage (these accounts cannot be jointly owned), there may be significant differences in the amount of assets in each account. A qualified domestic relations order (QRDO) allows retirement plan assets to be divided fairly in a divorce, with neither the account holder nor the recipient incurring early withdrawal penalties when receiving the money before age 59½.

The most obvious example where it would not be fair for each spouse to exit the marriage with their own retirement accounts is a marriage in which one partner has been the primary breadwinner and accumulated large sums in a 401(k) plan through work, while the other partner has raised the children full time. With no earned income, that non-employed partner’s only option for retirement savings would have been a spousal individual retirement account (IRA). As IRAs have much lower annual contribution limits than 401(k)s, the working spouse likely has far more retirement assets in their name—if a spousal IRA exists at all.

 

Source = Investopedia