Avoid These 5 Financial Pitfalls During Your Divorce

Posted on: 22 March 2016


Divorce is a time of great upheaval, and it's only natural to be stressed out and emotional. You may not be placing a high priority on your financial situation at this time, but failing to do so could mean making mistakes that could haunt you and your childrens' lives for some time. Taking the time to do some planning now, before your divorce is final, could create opportunities that pave the way for a healthier financial picture in the future. Read on to learn about the 5 financial pitfalls to avoid during your divorce.

  1. Failure to take a realistic look at your budget could be disastrous any time, but during a divorce this head-in-the-sand behavior could create untold misery both now and later. Sit down and list your bills and income for a month, which will help you to get a clear picture of the impact of existing on a single source income would entail. This info is vital before you and your spouse create a marital settlement agreement. Along with the monthly budget, take some time to create a net worth document. While the title sounds intimidating, it's really just a list of your assets (real estate equity, bank accounts, etc) and your liabilities (mortgage, loans, etc). The difference between the assets and the liabilities is your net worth. The major financial decisions called for during the divorce process require planning and having a clear, realistic picture of your financial health.
  2. Failure to consider the ramifications of being awarded the family home. It's easy to automatically assume that you must be awarded the family home. This is to be expected, especially if you have young children and wish to disrupt their lives as little as possible. Ensuring that you and your children are as secure as possible by keeping the family home is understandable and commendable, but be cautious and prepared before you ask for it. Stop and consider the financial aspects of home ownership, which means considering not only the mortgage payment, but the insurance, property taxes and upkeep. It's quite easy to end up with the family home, but with little else due to the unexpected burdens of home ownership.
  3. Making financial decisions based on the present cash value of an asset, instead of its potential future value. Some assets lose value over time, such as vehicles. Other assets have the potential to gain in value and represent opportunities for even more value. For example, real estate that grows in value could be used as collateral for a business loan, which could mean more financial security for you in the future. That vacation cabin could become a source of income if rented out when not in use.
  4. Allowing your divorce to become final while still holding joint credit card debt. Simply specifying who is responsible for what debt when it comes to credit card debt is not enough. If your name is still on the account, the creditor can still pursue you if your spouse fails to pay their debts. Make it a point to pay off joint credit card debt prior to the final decree.
  5. Failure to take advantages of a QDRO (Qualified Domestic Relations Order). Divorce presents a rare and unique opportunity to remove funds from your spouse's 401(k), or other retirement account, and avoid paying penalties for early withdrawal. Regardless of who deposited the funds, you may be entitled to take a penalty-free withdrawal. You will, of course, owe taxes on the funds unless you "roll" them into a another qualified account.

Talk to your divorce attorney about more ways to ensure a better financial future after your divorce.