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Money Mistakes To Avoid During a Divorce

Published April 20, 2021

7 minute read

David Ning

By David Ning

Divorce often takes a financial toll on everyone involved. There’s just no way around it. Anyone who has been through it already knows the stress it creates. Not only are there massive emotional hurdles to go through, but financial hardships too. If you aren’t prepared, it can take an even bigger toll. That’s why it’s an understatement to say you need to minimize your money mistakes if you are facing a divorce. The good news is that with a level head and some careful planning, you can actually see some financial light at the end of the divorce tunnel. Be warned, though, that it probably won’t be quick. And it’s definitely not easy. Regardless, here are 11 divorce-related money mistakes that you need to avoid at all costs.

Not Knowing the Complete Financial Picture Before Separation

You need to know about all of your marital assets. You’ll also have to keep that information readily available. Make sure that you have a list of debts, assets, bank accounts, insurance policies, and any other information related to your joint and individual financial situations. You need to let your lawyer(s) know where you stand financially as a couple, as of the separation date. In most states, you’ll actually be asked to submit a detailed financial statement as part of the process. Our advice in order to not cost yourself more money down the line? Be as honest and thorough as possible.

Don’t Hide Your Assets

Speaking of being honest, don’t try to hide any assets from the divorce. You won’t be the first to try it. Any capable lawyer is trained to uncover these types of schemes. That means don’t bother to setup complex trusts, hardware cryptocurrency wallets, or overseas assets. And no, you can’t sell your car to your buddy for $100 in order to get it off the divorce ledger.

If you attempt these things, you’ll just end up having more headaches in the future. The courts will also look at these behaviors very badly, which could result in more unfavorable rulings for you in the future. A judge could even give you less than you would otherwise deserve if you weren’t open about your finances. Whether you like it or not, a divorce is basically like splitting up a business. All (and we do mean all) of the assets and debts are calculated up, and then split up as evenly as possible. Don’t try to game the system.

Assuming You Know Everything

On the flip side, never assume that you already have the full picture. Your soon-to-be-ex might be trying to hide assets from you. Rack your brain (and your financial documents) for any hints of unspoken assets that may exist. We’re talking unreported income or hidden savings accounts. It can also mean online investments, like those in a stock trading app or a crypto wallet. Your lawyer will be able to help with this task too.

No matter how friendly or hostile your divorce might be, don’t assume anything. Unfortunately, humans are often inherently greedy. Now is the time to start digging around. Don’t be afraid to ask some hard questions, to make sure you’re getting a fair deal.

Letting Loose with Spending in This Moment of Crisis

Going through a divorce is an emotional process. It can be tempting to go through a little bit of retail therapy. Many people have let the purse strings loose during a divorce, only to later regret it. We’re not saying to avoid fun altogether. But your finances are probably about the change in a big way, so it’s not wise to splurge big. For example, an acquaintance of mine bought a super car after she filed for divorce. She figured that it’s basically half-off since the assets needed to be split anyway. Unfortunately, the legal system didn’t agree with her thought process. She still ended up wasting six figures during one of the most expensive times in her life.

Delaying the Inevitable

The sooner you can separate your finances from your former partner, the less complex the situation will be. It’s important to close joint accounts as quickly as possible. Keep the paperwork, split the money, and just open your own accounts. You need to be able to control your own spending and show that you are responsible with your money. It’s especially important to close joint debt accounts (like credit cards or lines of credit) as soon as possible. There have been numerous cases of a vengeful spouse racking up large bills and then trying to get their former partner to pay “their half.” Just make a clean financial split, as soon as possible.

This can include small things, like separating your cell phone bills from the family plan into two individual accounts. It can also include very large things, like a jointly owned house (and accompanying mortgage). Those larger things take more time, but they still have to be dealt with.

Forgetting to Budget for the New Life

If you are used to having a dual-income household, you’re in for a shock. Going back to a single-income household can be extremely difficult. Think about all of the expenses you probably shared with your ex — housing costs, food, utilities, car payments, etc. Now you have to do it all on your own.

If you historically made less than your partner, this can be especially difficult. Your partner may have been partially subsidizing your lifestyle up until this point. You need to be realistic about the situation and take into account the new circumstance as you prepare for the future. Don’t count on child or spousal support to bridge that gap, either. Even if you are entitled to those payments, they probably won’t make up the entire difference.

Not Putting Enough Aside to Weather the Transition

Divorce proceedings can drag on. In some cases, especially if you let your spouse handle the finances, it could be months (or even years) before you have a way to pay for life. That’s why you absolutely need to protect yourself. Try to make sure you have some savings stored ahead of time, just to weather the storm. If you don’t, you may be able to get a court order that your ex continues to financially support you until the details of the divorce are worked out.

Ignoring Tax Consequences

Alimony, child support, retirement accounts, and taxable investments all have different tax consequences. For example, retirement account withdrawals are subject to Uncle Sam’s cut. Child support, however, often is not (it depends on the local laws). This is especially important if you need those funds to survive financially.

On the other hand, there may be ways to play this to your advantage. If you have a good income, it may be worth it to receive more of the retirement assets instead of your higher taxed assets. In fact, we have a whole article about tax tips for the recently divorced that you should definitely read. A divorce is already expensive enough, so don’t make any mistake that increases your tax liability too.

Agreeing to a Proposal Prematurely

When you going through a divorce, it’s tempting to slip into role of martyr. This often happens if your partner initiated the divorce and is acting aggressive during the process. You need to be careful, though. These emotions can lead to poor decisions, like overspending or being so blinded by anguish that you don’t bother to find out what you’re entitled to. After all, you hate feeling that way and just want everything to be over, right? Yeah, don’t do that.

As hard as it might be, you need to take a step back. Take a deep breathe. Remember that these feelings won’t last forever. You shouldn’t agree to anything your ex proposes without having your own lawyer look into it first. A divorce proceeding can be financially complicated. Most of us are not properly equipped to navigate it, so you absolutely should hire a professional. Proper legal help is expensive (but there are some cheaper ways to get it), but you’ll probably find it well worth the money.

Handing Everything Off to a Lawyer

Once you do find a competent lawyer, it’s tempting to just hand everything off and avoid thinking about the situation. However, this would be a big mistake. Your lawyer can analyze the documents, sure, but they won’t have detailed knowledge of how the money in your household worked. You can really speed up the process by being engaged in the process. In some cases, you can likely do a bit of the easier digging or paperwork required. That will make the lawyer’s job easier, which means fewer billable hours on your invoice. It also gives you a better chance at a fair divorce settlement, since you’ll be providing information and feedback through the entire process.

The Bottom Line

A divorce can make it feel like the world is crashing down around you. If the emotional heartache wasn’t enough, you’ll also be incredibly stressed about your finances. How will you pay your bills during a divorce? Or after it, for that matter? They are big important questions. Making costly divorce mistakes won’t help your situation.

However, try to remain calm. You’re not the first person to go through a divorce and you won’t be the last. There’s still a bright future ahead for you. Just follow our above advice, consult a legal professional, and try to stay calm. Try to approach your divorce negotiations like a business deal. That means leaving your sadness and anger at the door, which isn’t easy. However, handling the divorce proceedings smartly and efficiently will cause you less grief — and save you plenty of money. At the very least, your finances will thank you for the rest of your life.

Divorce Money Mistakes Financial Concerns

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David Ning

Experienced Finance Writer

David is a published author, entrepreneur and a proud dad. He firmly believes that anyone can build a solid financial foundation as long as they are willing to learn. He runs MoneyNing.com, where he discusses every day money issues to encourage the masses to think about their finances more often.

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