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The Top 5 Financial Mistakes to Avoid During a Divorce

| July 10, 2018
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Very few couples have an easy, fast and uncontested divorce. With a marriage of any length of time, there will be joint assets, joint debts, and other issues which can be complicated. Emotions run high and most people want to get it all over and done with. This can be a huge mistake which will have repercussions not just in the immediate future, but long-term as well. That’s why it’s a good idea to seek professional help to assist you in making the best financial decisions.

Use this Divorce Financial Planning Checklist to help you avoid any potential mistakes along the way.

1. Ignoring or Underestimating Your Expenses

Unless you have a realistic budget, it’s easy to underestimate your living expenses. This can be a costly mistake because you need to know exactly how much you’ll need to maintain your lifestyle. Take the time to examine your finances, create a budget, and budget in inflation so that you aren’t blindsided in the future.

2. Deciding Financial Issues One at a Time

Only by having a comprehensive picture of your finances, can you begin to negotiate a fair settlement. Every financial decision has consequences so make sure to view every aspect of your financial situation, from income and assets, to taxes, and to capital gains and losses. In this case, it pays to take a whole picture approach.

3. Not Understanding Unsecured Debt

You may think that dividing up your debt is a fair way to handle your responsibilities. In reality, the liability for unsecured debt incurred during a marriage is shared between both spouses. The credit card companies aren’t bound by your divorce settlement. If your ex-spouse doesn’t pay what they agreed to, you will be responsible for the debt and the creditor will have no qualms about collecting from you. If at all possible, paying off your unsecured debt prior to the divorce is the best course of action.

4. Incorrectly Evaluating a Defined Pension Fund

A true pension fund (also known as a defined benefit plan or DBP), is controlled and funded by an individual’s employer and pays an annuity income or lump sum upon retirement. This type of plan differs from a defined contribution plan (401K). The DBP has value now, even though the employee won’t see any money until he or she retires. That means that the employee’s spouse is entitled to a portion of the value of the plan. Your Certified Divorce Financial Analyst (CDFA™) or an actuary may be needed to determine the value of the defined benefit plan. This is an area where you don’t want to be short-changed.

5. Failing to Consider Your Future Financial Situation

Oftentimes couples in the midst of a divorce are laser-focused on alimony, child support, and the division of assets. The problem is that your situation might be totally different in 5, 10 or 20 years especially if there are minor children that will be facing college expenses. A financial planner can review your settlement agreement and advise you about the best course of action.

These 5 financial mistakes can have devastating repercussions which can affect your life for many years after your divorce, or in some cases, your lifetime. You may think you can handle all of these considerations yourself, but the reality is that in most cases, you’re better off protecting your financial future by hiring a professional can help protect you from potential problems in the future as well as make the best financial decisions now, during your divorce.

When Should I Consult A Professional?

Most people think that they don’t need to consult with professionals because their assets are not substantial enough to justify the cost. The truth is that if you have assets, liabilities, retirement accounts, pensions, or property, you should have someone who can assess your situation and guide you in the right direction. The cost will be a minor consideration if you walk away with a fair settlement.

Which Professional Should I Hire?

A divorce lawyer will negotiate the terms of your divorce and settlement and will represent you in court if necessary. It’s recommended that you consult an attorney in any divorce other than an extremely simple, no-fault divorce where you have minimal or no assets and liabilities and no minor children

Divorce attorneys are expensive so it’s a common reaction not to want to spend money hiring yet another profession. However, a divorce lawyer isn’t a financial expert and there are cases where it may be advantageous to dig deeper beyond a basic financial inquiry to determine the couple’s true financial situation. In that event, a forensic accountant may be needed.

Forensic accountants can uncover hidden assets, assess whether property belongs to the individual or marriage, or determine whether fraud has been committed. When one spouse assumes control of the finances, it often puts the other spouse at a disadvantage when it comes time to negotiate a divorce settlement. A forensic accountant, often a CPA, has the skills in auditing and analyzing financial documents that help ensure equitable distribution of assets.

A forensic accountant may not be necessary if assets and liabilities are straight-forward and there are no complicated assets which must be valued.  However, there are financial and tax implications which still need to be considered. A CFDA™ has extensive knowledge related to equitable asset distribution, tax law, and financial planning. These professionals not only provide you with a clear picture of your finances but can also advise you on the tax implications of your settlement. These professionals can also help you create a post-divorce budget which will cover your family’s needs.  They can also testify in court as an expert witness and provide any necessary supporting documentation as evidence.

Conclusion

Divorces are stressful for many reasons and financial concerns are often a big issue. It is natural to worry about covering expenses on one instead of two incomes. It’s critical to know how much you have and how much you need before you can begin the process of negotiating the financial aspects of your divorce agreement.  Avoiding the 5 most common financial mistakes we covered, will allow you to move forward with the knowledge that you have reached the best possible settlement for you and your family.

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