Divorce has a massive impact on your life in many ways. In a relatively short span, your living situation, relationship status, and how much time you get to spend with your children may all undergo a titanic shift. One of the biggest consequences is often the financial impact of dissolving your marriage.
A significant part of the process is the division of property, where the two sides split up the shared assets and debts acquired over the course of the marriage.
As divorce can be a highly emotional time, parties may act quickly and without fully thinking the situation through. This haste can be expensive.
Here are a few common financial mistakes in divorce that can cost you in divorce. You may want to take steps to avoid these pitfalls.
1) Not Knowing The Value Of An Item
Some pieces of the financial puzzle are easy to put a price tag on. Look at a shared bank account or loan debt. It’s plain to see just how much it’s actually worth. This is also an asset that is readily accessible. For other items, however, the picture is not quite so clear.
A car or a house, for example, presents complications.
- While these may have a value on paper, you may not always be able to sell it for that figure.
- Though it may have a specific worth when it comes to your settlement, items like these may be hard to liquidate.
- A sale can be a lengthier process. If you must sell quickly, you may take in less money.
It also happens that parties overvalue items due to an emotional connection. We all form attachments to certain possessions, placing added worth on an article that may not have much real-world basis.
In these situations, you run the risk of spending a great deal of time arguing back and forth about objects of relatively minor value in the grand scheme of things. People often focus on these items and less on those that have a greater financial impact.
Related Reading: 6 Unexpected Divorce Assets
2) Not Planning for Taxes
One aspect many people neglect to take into account during the division of property is the cost of taxes. Not only will your status shift dramatically after your divorce is finalized—you will no longer be able to file as married, after all—but it may impact assets you receive in the split.
For instance, capital gains taxes can play a huge role following your settlement. This may be felt when it comes to everything from real estate to investments and more. But not all assets are created equal or treated the same way.
Many times, the sale of a principal residence may not be taxed depending on how much gain exists. There is a $250,000 cap gain fee for individuals, $500,000 for couples.
This is different, however, when it comes to things like a 401k, IRA, or pension. If you take funds out of retirement, excluding any early withdrawal penalties, you may be taxed the full rate.
While it may seem like you got a screaming deal in the division of property, if you’re not careful, you may wind up with a substantial liability down the road. Before agreeing to any settlement, it may be in your best interest to consult a tax specialist or experienced attorney.
Related Reading: The New Tax Plan and Divorce
3) Not Considering Credit
Another element that often flies under the radar is how divorce impacts your credit rating. After finalizing the split, your former spouse’s credit ceases to influence yours. You both apply for loans and credit cards as individuals from here on out. However, if there are remaining shared debts, this financial mistake can still influence your credit score, even after the fact.
Getting a divorce doesn’t alter pre-existing agreements you and your spouse jointly entered into while married. If you secured a car loan, mortgage, or accrued significant credit card debt in both names, you remain on the hook for those payments.
The court may assign your ex to pay a joint debt like this. Ideally, that’s what will happen. But if it doesn’t go down that way, it may negatively impact you and your standing.
The final agreement can include provisions like requiring your former spouse to refinance a loan and remove your name by a certain point. Still, it never hurts to keep an eye on your credit score and double-check.
Related Reading: How To Protect Your Business During A Divorce
4) Failing To Budget
In the best of times, it’s all too easy to lose track of your expenses. Especially with the drastic change in financial circumstances that occurs following a divorce.
Far too few people take the time to sit down and lay out a specific, detailed budget. It may seem like a pain, but will serve you well in the long run.
Many people overestimate the amount they have while underestimating the amount they spend. After a divorce, you may wind up supporting children, covering all the costs of keeping a home, or even providing spousal maintenance. That adds up quickly.
Before you agree to a settlement, sit down and figure out precisely what you have and what you can spend. It may be time-consuming and dull, but you don’t want to sign an agreement you can’t afford. Don’t make an even worse financial mistake.
Related Reading: The Cost of Divorce: What You Should Know
5) Missing Assets
Shared assets are split up between the two parties during the division of property. But the court only distributes what they know about.
Ideally, you have enough trust and honesty that you and your spouse will be upfront when it comes to disclosing resources. That, however, isn’t always the case.
In some instances, one party may maintain secret accounts or do what they can to keep money and property out of sight.
If these hidden assets are not unearthed, it may impact the settlement and not bode well for your credibility.
There are ways to search for clandestine holdings.
- You may want to check recent tax returns for inconsistencies.
- Examine bank accounts for large expenditures you didn’t know about.
- Use brokerage statements to look at the purchase and sale of stocks and bonds.
These are just a few places to investigate, but you may want to be as thorough as possible. If you have questions about whether or not your spouse disclosed everything, you may want to enlist the help of an experienced professional to help dig.
These are just a few potential financial mistakes that often occur during divorce. This can be a stressful, emotional time, where you’re juggling a great many balls. In this situation, things slip through the cracks.
Divorce alters your finances in dramatic fashion. Take the time to consider the repercussions of your choices during the process. You want to start the next chapter of your life on the best economic footing possible.
Related Reading: Community Property Vs Equitable Distribution: What’s The Difference?
Editor’s Note: This is an updated version of an earlier post and has been revamped for accuracy and comprehensiveness.