Divorce is hard. There are a lot of emotions involved. Decisions must be made quickly at times. At other times it seems progress is slow and you are happy to do anything.
This leads to situations that are ripe for poor decision making.
Below is a list of 10 financial mistakes that you should avoid in your divorce.
#1 Not Properly Valuing Property
Dividing property in a divorce involves four steps: identify the property, characterize the property, value the property, then divide the property.
A fair division of the overall community estate requires an accurate valuation of each individual piece of property.
Do not rely on old appraisals. Get a new one.
Do not rely on a tax appraisal for real property. Get an appraisal done to determine market value.
Do not rely on market value for real estate that generates rental income. Treat it like a business and value that future income stream.
These are just some examples. You do not want to find out years later that the property you thought was worthless turned into a goldmine for your spouse.
#2 Fighting Over Property You Cannot Afford
I know you love your house. It was your home for years. It’s where you raised your children. Your neighbors are your friends.
But that mortgage payment would be 50% of your monthly income after the divorce.
That $750 car payment doesn’t work if you only make $3,000 a month.
Not to mention the attorney’s fees you are paying to fight for this asset that you can’t even afford.
Do not let an emotional attachment to a thing have a negative impact on your financial well being.
#3 Not Making A Budget For Life After Divorce
This is related to mistake #2. I tell every client to make two budgets – one for current expenses and the other for life after divorce.
You need to make sure you earn enough to have a reasonable standard of living after the divorce.
People often fail to accurately estimate their monthly expenses and find themselves in trouble after the divorce because they cannot afford the lifestyle they were used to.
Life is much more expensive with only one income.
If you cannot afford a reasonable standard of living after divorce, then you need to address that in the divorce whether by property division, child support, or spousal maintenance.
#4 Not Setting Child Support At An Appropriate Amount
Children are expensive. I know – I have two of them. I can’t imagine paying for more.
If you are able to negotiate an agreement to settle your divorce, then the amount of child support will be an important part of that negotiation.
Do not make the mistake of setting it too low. Do not trade a low child support amount over the long term for an asset that, while it is cash in the bank now, will generate less revenue over time.
Texas has statutory guidelines for child support. But those are just guidelines. There are dozens of reasons why it may be appropriate to deviate from those guidelines in your divorce.
The opposite is true as well.
If you are going to pay child support – do not commit to paying too much. A divorce decree is a court order. If you agree to pay more child support than you should have, the Attorney General and court will hold you to that obligation.
You love your children and want to provide the best for them. I get that.
But remember: nothing in the law says that you cannot provide financial assistance above and beyond your child support obligation. But you MUST pay the child support you agree to.
#5 Not Negotiating The Child Tax Credit
The IRS says that the parent with primary custody of the children gets to claim the children as dependents for purposes of obtaining the child tax credit.
Did you know that the IRS also says the parent with primary custody can assign that right to the other parent? The right can be assigned permanently or for specific years.
This means that the child tax credit is negotiable and can be shared by the parents as part of any negotiated resolution of the case.
#6 Not Considering The Value of Assets Over Time
An asset has a value today but that same asset may be significantly more valuable over time.
Two questions answer whether an asset may have more value over time.
First, does it generate income? Think about a rental property or a business. Both have market values today, but future income adds to their actual value.
Second, what type of asset is it? A car and a house are not equal types of property. One declines in value and the other grows in value.
Similarly, a house is not the same as a retirement account. One may grow in value and the other may grow much more quickly. One can be liquidated before retirement without penalty while the other cannot.
#7 Withdrawing Money From Retirement Accounts
If you are over 59 1/2 years old, then this one does not apply to you. For everyone who is younger than that – pay attention.
You should avoid withdrawing funds from a retirement account in a divorce if at all possible. There are 2 financial penalties associated with this mistake.
The first is a tax penalty for those of you under 59 1/2 years old equal to 10% of the withdrawal. The second penalty is having to pay taxes now with funds that would otherwise be invested and growing tax deferred.
This does not mean that you cannot divide retirement accounts. You can, just make sure you do it in a manner to avoid a taxable event such as through the use of a Qualified Domestic Relations Order (“QDRO”).
But if you just withdrawal the funds and write a check be prepared for one heck of a financial penalty come tax time.
#8 Not Planning How To Support Yourself During The Divorce
Can you afford to live on your own with your current salary? Even before your divorce is final?
This is an important question to address. If you have the opportunity to save up a cash reserve, then do it.
To be clear – I do not mean that you should hide money – the fund must be disclosed as part of the divorce.
But you should, if possible, put together a cash reserve to help you through the divorce.
The last thing you want is to restart your life saddled with a ton of credit card debt you used to pay your living expenses.
#9 Not Addressing Joint Liabilities
Texas is a community property state. But there is no such thing as community debt.
Debt belongs to the party whose name is on the debt. If both of your names are on the debt, then it belongs to both of you.
Even if your divorce decree assigns the debt to your spouse, that does not change your obligation to the third party. The divorce court does not have that authority.
You are still legally responsible to that third party if your spouse does not pay the debt. They will sue you too. Sure, you can sue your spouse but if they didn’t pay the debt then they probably do not have the money to indemnify you either.
You should address payment of these debts in the divorce and make sure that you are protected.
#10 Fighting Just To Fight
There is a common saying about divorce: once the papers are filed it becomes a business transaction.
That is hard to hear for a lot of people to accept.
That is your spouse, someone that you spent a significant part of your life with.
Those are your children that you no longer get to see everyday.
Maybe your are angry that your spouse did something to cause the divorce. Maybe they lied to you. Maybe they cheated.
Maybe no one did anything “wrong” things just fell apart.
Maybe your spouse filed for divorce and you don’t want to get divorced. You are left wondering what you could have done different, hoping maybe you can save your marriage.
In any of these scenarios it is not uncommon to want to fight. Fight for the purpose of punishing the deceitful spouse. Fight to find answers to questions. Fight to save a marriage that is already over.
Don’t do it. The only one who wins in these cases are the lawyers.
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