8 Mistakes to Avoid in Your Divorce Settlement

If you think weddings are costly, try getting a divorce. A fortunate few may have lived with their ‘happily ever after’ but 50% of married couples in the U.S divorce in their marriage (USA Today). And with divorce comes baggage that needs sorting out.

The process of dividing assets can be a headache if you and your partner have not sorted it out prior to this phase when you agree to your divorce settlement agreement. Here are some financial mishaps that people often make during divorce.

#1 Not budgeting ahead

There is the necessity to pay legal fees and whatnots if you don’t have enough money to cover for all the expenses. While women (and probably some men) may want to go on retail therapy to lessen the ‘pain’, it’s a necessary evil to have if you both sit down and talk things through.

Be honest about your budget and see whether keeping that house is worth fighting for. Your assessment should be realistic whether you will have enough to sustain a house or you’re better off renting. If you have kids, see how much you will pay for support after you’ve factored all expenses in.

#2 Using investments as cushion money

Paying the bills might be the first thing that will come to mind. While that impending divorce may prompt you to sell high value assets, doing this cuts its appreciation value. As we all know, bills payment and cash are non-working assets, hence they won’t be able to make money for both of you. And never forget the taxes that go with it. Even after a divorce, you will still have goals to achieve and milestones to cover.

#3 Not sorting financial documents

If you’re like Marie Kondo, this won’t really be a big deal. However, if you’re not an organized person, you will need a lot of willpower and determination to have all your assets sorted out. Dividing assets will require valuation—such as a cash advance online for paying goods and services–and proof where legalities is concerned. You need to know ‘what you own’ (assets) and ‘what you owe’ (debts) for your lawyers to come up with accurate numbers and not just creative fiction.

#4 Neglecting spousal support and taxes

If you’ve had the divorce filed before December 31, 2018, you would’ve gotten away with a smaller tax deduction if you’re the one paying the alimony. However, post-Trump tax plan, the game plan has changed. There are no more tax breaks for individuals paying alimony. This should be worth considering and re-thinking your budget plan.

#5 Failure to expect Social Security eligibility

Here’s the deal: For couples who are married for more than 10 years, the partner with a lower income or is not working can still enjoy the higher income partner’s social security benefits through a derivative. Bottom line: if you’re the higher income earning spouse, your social security payments won’t decrease even after the divorce.

#6 Ignoring taxes

Prior to debts and money for all the necessities to get a divorce can put a tight lid on your cash flow and savings. While the 401(k) could be a tempting ‘cushion money’ to settling all your financial dilemmas, individuals can get slapped with a penalty from the IRS if you don’t have taxes withheld. You can, however, get a QDRA (Qualified Domestic Relations Order) to help place funds from your former spouse’s retirement account and placing it to your IRA so you don’t get your taxes deferred.

#7 Not thinking through Divorce lawyer fees

Consider this: Lawyers can charge as much as $450 per hour (family law firms). However, lawyers have their limitations. While a few may be oriented with financial dealings, some are contained in their knowledge on the legalities of separation—not the cost. They are also not therapist so you don’t expect them to help you sort out the emotional aspects of a divorce. Hence, adding a professional financial planner, therapist, and vocational expert expense may be additional costs.

#8 Settlements may be too good to be true

As they say, if it’s too good to be true, investigate. You need to be wary of your rights. Spouses and children may need to adjust to a ‘less comfortable’ lifestyle and not look into things such as shopping for new clothes, groceries, and whatnots to live within their means. There should be enough money for the spouse to live on or it can go on default. Always consider fairness when you’re dealing with the numbers. As much as you can, get the payments upfront and have your assets and insurance secured.

After divorce, the future is up to you. You can start with a clean slate and work your way back again in life. But the grass is always greener where you water it. It’s time to reboot and make the most of your newfound freedom—even if you’re going through life alone.

Written by Lidia D. Staron


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