The Twelve Financial Pitfalls of Divorce

Each year, nearly 2.8 million people experience the emotional and financial challenges of divorce. During divorce, many individuals are concerned about financial survival—and with good reason. Studies show that in the first year after divorce, one partner’s standard of living may drop almost 27 percent while the other partner’s may increase by as much as 10 percent.

Many factors contribute to financial challenges after divorce. Child support may not adequately cover the true costs of raising children, and one partner may have lost important years of career growth, making it difficult to regain financial stability after the divorce.

Advance planning goes a long way. By familiarizing yourself with the twelve financial pitfalls of divorce, you can save yourself a lot of heartbreak—and hassle—in the future.

Twelve Financial Pitfalls of Divorce

Not enough cash.
Expenses will begin to mushroom as soon as the divorce process starts. Legal fees, court costs, therapist bills, new living expenses, and myriad other costs will drain your financial resources. Money previously used to support one household must now stretch to support two. If you are contemplating divorce, now is the time to begin amassing the funds you’ll need to stay afloat.
Too little preparation.
Divorce is a long, complicated process that requires careful preparation. Before you jump in headfirst, consult with legal and financial professionals and read books about the subject. Think about the timing of the separation: Is your partner due a bonus or other windfall in the near future? Don’t separate until after it arrives, so it will be shared as community property. Think about Social Security: If you’ve been married nine years, you might want to stay married for one more year to qualify to collect on your ex’s earnings record. Finally, don’t just pack your bags, load up the kids, and drive away in a car that needs four new tires. Before you separate, buy the clothes you’ll need, perform maintenance on the car, and fix the kids’ teeth.
No records.
The three most important words during divorce are: document, document, document. Try to obtain copies of all financial records before your divorce begins. Make clear copies of all tax returns, loan applications, wills, trusts, financial statements, banking information, brokerage statements, loan documents, credit card statements, deeds to real property, car registrations, insurance inventories, and insurance policies. Also, copy records that you can use to trace your separate property, such as an inheritance or gift from your family. These assets will remain yours as long as you can document them. Copies of your partner’s business records can be a treasure map showing where hidden assets might be buried.
Overlooking assets.
Don’t overlook any assets—half of everything is yours! Even if you don’t want an asset, it can be used to trade for something you do want. Inventory safe deposit boxes; track down bank and brokerage accounts; review pay stubs, retirement plans, and insurance policies. If your partner’s business generates a lot of cash, engage a forensic accountant to look for telltale signs of additional income. Don’t overlook hobbies or side businesses that might have expensive equipment or generate income. If you helped support your partner during their education or training, you might be entitled to reimbursement for that investment.
Ignoring tax consequences.
Should you take monthly alimony or a lump sum? Should you take the brokerage account or the retirement plan? Should you keep the house or sell it now? Who should pay the mortgage until it sells? Don’t ignore the hidden tax costs of divorce in making these decisions. Your situation may require some calculation by an accountant to determine if you are really getting the best deal. If there’s a chance that your past joint tax returns omitted income or overstated deductions, you may want to seek an indemnification clause to protect yourself if the IRS decides to audit.
Ignorance is bliss.
During divorce, ignorance is certainly not bliss—instead, it can be very, very expensive. Don’t be a passive observer of your own divorce. Doing as much as you can by yourself will help you recover more quickly because you will have a healthy sense of control over the process, be focused on practical things, and be working with your ex to get things done. Taking an active role in the negotiations will help you reach a better settlement than “letting the attorneys handle it.” You will have less conflict and litigation after the divorce, better compliance from your ex, and better sharing of information about the children. Your attorney may give you legal advice, but all the decisions are ultimately up to you.
Mixing money and emotion.
During this trying time, it’s easy to confuse your feelings with the facts. Try to be as dispassionate and businesslike as possible. View your attorney as a paid professional rather than a friend or confidante. When your grief is overwhelming, go home or to a friend’s house, not to your attorney, who is billing you at their normal hourly rate. Make property division decisions based on your long-term best interest, not out of revenge. Declaring war on your ex won’t make you happy. Make an effort to bring the divorce to a successful conclusion with as little conflict as possible. A contentious divorce benefits only the attorneys.
Not fighting for what’s yours.
People often tend to be supportive and sensitive to the needs of others, to build bridges, and to “make nice.” These tendencies can get in the way during divorce. Divorce is about survival, not making friends. You have to insist on getting what you need and deserve. Even if you hope for a reconciliation, don’t bend over backward to make it happen. Stand up for yourself and get your share. If you reconcile, that’s fine. If you don’t, you’ll still be able to take care of yourself financially.
Not taking control.
Divorce can make you feel like the captain of a leaky boat on stormy seas—there seems to be a new crisis at every turn. Use this time of upheaval to start taking control of your life. Don’t worry in the dark—if you can’t sleep, turn on the light, pick up a pencil and paper, and write down your worries. Then, you can deal with them first thing in the morning. Also, try to get a lump sum whenever possible so you control the cash. Listen to your attorney, but make your own decisions. This is your divorce—so take control of the process!
Not being ready for the worst.
During divorce, prepare yourself mentally for the worst that can happen. How will you cope if your children get sick? If you have to move in with family? If the divorce lasts for years and you lose all your money? If your ex remarries quickly, moves far away, or refuses to pay any support? Plan for the worst so what actually happens will seem manageable by comparison. Face your fears head-on and prepare accordingly.
Not developing a career.
Many people put their careers aside to concentrate on their families. After divorce, you will probably need to figure out a way to support yourself and your children. Divorce is an excellent time to get some career counseling at the local job center, university, or community college. Prepare for the expense of tuition and books while you get your career on track. Remember: there’s nothing like new knowledge and a fulfilling career to bolster your self-esteem.
Not getting good professional advice.
Right now, you need all the help you can get! Divorce can be very complicated, so don’t try to do it all yourself. Hire an attorney who can give you excellent advice—even if they aren’t the least expensive. Engage a forensic accountant if you think there might be hidden assets. Find a good therapist to help you emotionally. Hire a divorce financial professional to help determine the best settlement options for you. Don’t skimp now on matters that will affect the rest of your life.