Divorce and Finances

Financial Mistakes to Avoid when Getting Divorced

Divorce can be extremely difficult on many fronts, but financial ramifications can impact you the longest. It is important to be aware of common financial mistakes so that you can avoid them.

Getting Divorced - The Top Financial Mistakes Often Made

Whether it's a friendly parting or a contentious battle, getting a divorce is never easy. And the emotion of the event often keeps people from thinking through all the financial implications. As a result, people often make serious financial mistakes that affect them for years to come. That's why we asked a financial planner to outline some of the top financial mistakes he sees when helping clients through a divorce:

Forgetting About Shared Debts

Many people just don't think about the implications of shared credit. If you took out any joint loans or credit cards during your marriage, you're just as responsible for paying them off as your spouse. Lenders won't forgive your responsibility after a divorce, even if your divorce agreement says that your ex-spouse will pay everything off. If they don't, lenders could still come after you for payment and your credit score could take a hit. A safer strategy to consider might be to pay off all shared debts before finalizing your divorce so that you both head off with a clean slate.

Over Attachment to the Family Home

After years of living in your family home, it's easy to feel a strong emotional bond that makes people not want to move out. But you need to think hard about whether it makes financial sense to keep the house. Will you be paying the mortgage and the bills by yourself going forward? If you take the house, will your former spouse get more of the other assets you two accumulated during the marriage? It may make to more sense to sell and downsize to a more affordable property.

Not Buying Insurance on Alimony and Child Support

If you're going to receive alimony and/or child support after your divorce, you should consider protecting that future income. If your ex-spouse dies, that income would disappear. A life insurance policy on your ex-spouse could replace this money if they died. It is possible to set up your divorce agreement so that some of the alimony or child support goes towards paying for this coverage.

Miscalculating the Value of Property

Coming up with a fair split of your property isn't always easy. What if you own assets that can go up and down in value like stocks? Should you consider these assets to be more valuable than your cash? Less valuable? The same? The answer isn't obvious, especially if you aren't comfortable with investing. It's better to leave this calculation up to a professional like an accountant or financial planner. This way you won't have to worry about miscalculating and leaving yourself with an unfair share.

Mishandling Retirement Accounts

This one is tricky, and something many people struggle with during the divorce. You need to be careful with your retirement accounts because they carry more tax rules than other assets. 

To address this, your divorce agreement should include a Qualified Domestic Relations Order (QDRO) for your shared retirement plans. This document lets you move money out of your spouse's retirement plan into your own IRA or 401(k) to satisfy your divorce agreement, and generally you wouldn't owe any taxes when transferred.

Filing for divorce may seem like the end, but preparing to separate financially from your spouse is really the beginning of your life after the marriage ends. It is tedious, but you need to avoid making financial mistakes that will set you back. These tips are designed to help you avoid some of the biggest financial mistakes people make when getting divorced. For more information on financial topics, visit our learning center.

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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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