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Financial Mistakes You Can and Should Avoid in a Divorce


The following are some insights gained by your friendly Katy Lawyer, compiled from years of experience and from a few other professional sources. These are not to be construed as legal advice. Please see the disclaimer page for further clarification.

Negotiating for Assets Based on Emotional Attachment

The home in which you lived, the expensive art you purchased that your spouse never liked and your hard earned pension are the types of property that can bring about an emotionally charged divorce. The fact is many post divorce people can’t afford to hold on to their marital residence. In the stress of a divorce, retirement planning often becomes a low priority. We have learned that as an investment, a house typically yields low annual returns (appreciation possibly as low as 2 to 3 % annually), and is a cash flow pit (mortgage payments, taxes, utilities and maintenance). Again, once you’ve gone through the emotional roller coaster that brought you to the decision to separate from your spouse, you need to get your priorities in order. Unless it is an important family heirloom from your side of the family (i.e. grandmother’s wedding ring) it’s probably not worth fighting for. The most cost effective approach is to agree on the value of assets and settle on who gets what. Alternatively you might agree to liquidate the assets in question and split the proceeds. The cost of two attorneys fighting over a painting in court can be costly. Typically, the settlement of the pension you earned is going to be subject to equitable distribution and community property laws. Our suggestion: pick your battles wisely.

Hiring the Famous Killer Divorce Lawyer

Hiring that well known aggressive trial lawyer may turn out to be a very costly and unproductive move. Unless it’s an exceptionally egregious case, equitable distribution laws often determine settlements, and so no matter how badly your spouse has behaved, the court probably isn’t going award you as big a disproportionate share of the community estate as you would like. More importantly, an aggressive attorney can spend many additional hours fighting the good fight on your behalf ultimately leaving you, at the end of your case, with less money for moving on with your life. Divorce is not a school yard fight. It is the business of dividing assets, liabilities, and responsibilities. Drama and revenge can be major budget items in a divorce. Suggestion: avoid them if at all possible.

Financial Complacence

If you see a divorce coming, get your financial records in order. Make copies of all your important records and store them in a safe place where you will be able to access them on short-notice. Banking records, account statements, real estate records, charge account statements, tax returns and tax documents are records that you may need to access at a later time. Keep an eye on cash accounts – not just joint bank accounts, but money markets, brokerage and cash value life insurance accounts. Watch for sudden loans or new credit card accounts. If you see any activity out of the ordinary that suggests that your spouse is liquidating or retitling marital assets, notify the holder. You can seek a restraining order from the court to stop this type of liquidation. If assets are taken or hidden, the cost to recover those assets can be costly. Our suggestion: be vigilant and proactive.

Failure to Adequately Insure the Divorce Settlement

A friend of mine who is a local Katy divorce lawyer once had a client who had been divorced for two years. The client was happy with the settlement. She was able to support herself and the children while going to nursing school. She was happily living her post divorce life when her ex-husband was tragically killed in an automobile accident. The support side of the divorce settlement immediately became valueless. Nursing school was put on the back burner and the client had no choice but to take a position as a clerk receptionist in a doctor’s office. Life and disability insurance could have guaranteed her payments and her family’s future. Just because you divorce doesn’t mean you can count on the continued revenue stream that has been provided to you in your divorce settlement. Our suggestion: have a backup plan.

Refusing to Mediate

If both parties can agree on an equitable settlement, can come up with an agreeable custody arrangement and agree to a division of assets and liabilities that is not excessive, they are likely to save a lot of money in legal fees and bring their divorce action to a prompt resolution. Additionally, the children are saved the trauma of a drawn out legal battle. However, if one spouse is unwilling to consider a fair settlement, is hiding assets, liquidating property, cleaning out asset accounts, etc., or is unwilling to negotiate in good faith in informal settlement negotiations, mediation will probably not be an option, or at least not immediately. Our suggestion: utilize formal discovery if your awareness of the extent of the community estate, the community liabilities and your respective separate estates is lacking or uncertain.

Rushing the Development of an Accurate Budget

If you are asked to produce a temporary budget, take your time to consider everything. It is a common mistake to omit or underestimate expenses when producing an initial temporary maintenance budget. The consequence: you may be unable to make ends meet half way through the divorce process. Our suggestion: be thorough and don’t rush this step. If you are spreadsheet challenged, get help, but make sure you produce a realistic and complete budget.

While You’re Fighting Each Other – Don’t Ignore Your Common Enemy

It isn’t always easy to be rational when you’re in the middle of a divorce, but, you and your spouse have common debts and liabilities that you may be able to manage to your mutual benefit or to your mutual detriment – your choice. The IRS is a common foe. Our suggestion: get a financial planner or tax accountant that specializes in divorce to minimize the total taxes both of you pay during and after the divorce. Both parties can possibly benefit in the money saved. Remember that both of you can be held liable for taxes due if there is an audit on joint returns. The fact that your spouse did the joint tax return is usually a losing defense argument in the tax court.

Ignoring the Impact of Taxes on the Divorce Settlement

What’s the big deal? You split the investment portfolio down the middle, and go your separate directions – right? Wrong! Our suggestion: you should look at the value of these assets on an after tax basis evaluation is done by a tax professional. Then you can decide if a 50/50 split makes sense.

Paying your Divorce Lawyer for Financial Planning, Spiritual Guidance, Therapy and as a Go-Between.

You may find yourself asking your divorce lawyer questions about your temporary budget, financial questions about settlement modeling, why is this happening to me, how do I deal with my anger, and can you please tell my spouse to pick up our child at four o’clock today. After all, he deals with divorces all the time, he knows all about these things. Keep in mind that a financial planner typically charges around $125 an hour or less. A psychologist may charge you $150 or so per hour and a telephone is of nominal cost. A clergyman is usually free. On average, experienced lawyers charge significantly more per hour than any of these other professionals. Suggestion: use your divorce attorney’s time wisely.

Not Modeling the Settlement Proposal

Today there are computer modeling capabilities available that are specifically designed for settlement and post divorce financial planning. These models allow you to understand what the implication of the settlement will be in relation to the many financial variables down the road – at 2, 5, or 10 years from the settlement. Things that should be considered, in these models include income, child support, maintenance, assets, budgets, retirement plans, investments, college funding, taxes, and more. These models allow you to do “what if” analysis to make sure the settlement makes sense for your life after the divorce. Our perception: they are inexpensive to use and may save you from a bad settlement.

Jumping at the Settlement Offer That’s too Good to be True:

First of all, if it seems too good to be true it probably is just that. After a divorce everyone, spouses and children have to make adjustment to life styles. If the settlement doesn’t work for one of the ex-spouses they are probably going to default. Both sides are hiring attorneys again. Make sure the settlement is going to work for you and don’t try to squeeze your spouse or get them to take a bad deal if it is going to lead them to eventual default. It just isn’t smart. Our suggestion: if you settle for payments, make sure they are backed up by assets or insurance.

Disregarding Inflation for "Down the Road" Expenses.

In today’s economy, inflation will soon be a huge factor. It is impossible to guess what education or retirement costs will be 15 or 20 years from now. There is talk of hyper inflation in the future. The only way to plan in this environment is to get help from a professional financial planner. Our suggestion: use a conservative one. The rule of 72 can help to understand the impact of inflation. If the inflation rate is 3%, the rule of 72 states that prices will double in 24 years (72/3=24). If we see inflation in the near future like we had in the 1970s around the 21% level, a $10,000 college tuition today could run as high as $44,000 in 15 years as it would double 3.38 times over 15 years. This is very important to remember in your budgeting for the settlement negotiation.

Missing Out on Social Security Retirement

The spouses Social Security retirement benefit is split down the middle if the couple has been married for 10 years or more. It is our understanding that of all divorces in the U.S. the average length of marriage is 9.6 years. Our suggestion: if you are contemplating divorce, you may want to keep this in mind. If you’ve been married 9 years, you may want to ask yourself, is it worth it to stick it out for one more year to gain a possible increase in this retirement benefit?

Not Updating Estate Documents

People quite often forget to update beneficiary information on retirement accounts, insurance policies and their wills after a divorce. Such oversight can result in your ex-spouse inheriting the estate that you intended to leave 100% to your children, to your new spouse or perhaps to your church. This is an oversight you just don’t want to make. Check with your attorney to find out what changes can be made to your will and your “pre-probate” documents, if any, before and after your divorce. The ideas shared above are not to be construed as legal advice. Please see the disclaimer page for further clarification.
If you are ready to speak to an attorney, you can fill out the Katy divorce attorney form or speak with C.E. Schmidt now by dialing:
832.541.7002