Five Costly Divorce Financial Mistakes That May Haunt You Later

Even in the most amicable circumstances, divorce has the prospect of being a truly emotionally draining process. Time and again, the nature of the divorce process oftentimes forces people to make rapid-fire decisions at a juncture in time when they are least prepared to think clearly. The fact is that the financial consequences of those decisions can echo for years, even over the course of decades. In the final analysis, a divorce settlement is not merely paperwork. A divorce settlement is the very foundation of your future financial stability. As a consequence, it is imperative that you avoid the five potentially most costly divorce financial mistakes. 

Undervaluing or Overlooking Long-Term Assets

During typical divorce settlement negotiations, many individuals focus primarily on immediate, tangible assets that include:

• Marital residence 
• Automobile or automobiles
• Mortgage
• Bank accounts

On the other hand, what can prove to be highly valuable assets are often the ones that feel distant:

• Retirement accounts
• Pensions
• Deferred compensation
• Stock options
• Future value of a business

By way of example, it is remarkably common for someone to trade away a share of a spouse’s retirement plan in exchange for short-term liquidity. Unfortunately, what feels like necessary relief in the moment can result in financial insecurity later on in life. 

As another example, failing to properly value a spouse’s business ownership interest can create an enormous imbalance in the future. Many small business owners understate the value of their enterprise. They reach purported valuation without professional assistance. As a result, it becomes nearly, if not completely, impossible for a spouse to know what they are agreeing to in divorce settlement negotiations.

Letting Emotions Drive Divorce Settlement Negotiations

Another rather commonplace item on the list of divorce financial mistakes is letting emotions drive settlement negotiations. Time and again, this crops up when it comes to the marital residence or family home. For obvious and understandable reasons, the family home symbolizes stability, memories, and continuity. The associated emotional weight leads many people to fight fiercely to keep the family home, even in circumstances when the numbers make no sense, when the numbers simply do not add up. 

Undisclosed issues lurk beneath the surface:

• Mortgage payments
• Property taxes
• Insurance
• Repairs
• Maintenance
• Ongoing costs of simply maintaining the residence

Failing to Understand Tax Implications

The tax consequences of divorce can prove to be complicated. The reality is that misunderstandings about tax consequences of decisions made during the divorce settlement process can result in the expenditure or loss of tens of thousands of dollars. Ultimately, a divorce settlement that looked fair on paper may not be equitable once taxes come due at a later date.

What appears to be an equitable division of assets (as mandated by New Jersey divorce law) can ultimately morph into something imbalanced and unreasonable once taxes are considered. Consult a tax professional before finalizing a divorce settlement agreement to avoid tax shock in the future.

Overlooking Hidden or Future Debt Obligations

People understandably focus on dividing assets during the divorce process. However, a frequently occurring item on the list of divorce financial mistakes is forgetting to properly pay attention to debt division. The bottom line is that debt division is vitally important and can be powerfully devastating if mishandled. 

You must keep in mind that divorce settlements typically assign responsibility for shared debts. With that duly noted, you must also focus on the fact that creditors are not bound by those agreements. What this means is that a spouse can be held liable for a joint credit card or loan even if the divorce decree assigns it to the other party.

Moreover, failing to anticipate future obligations can also leave you financially unprepared. Commonplace examples of key future obligations include such things as:

• College tuition
• Medical expenses
• Childcare
• Insurance
• Long-term support

On related notes, you also need to bear in mind that some spouses underestimate how quickly debt can accumulate in the months leading up to the commencement of a New Jersey divorce case. Other individuals wrongly assume that a former spouse will responsibly pay joint debts assigned to them, only to discover late payments damaging credit years later.

Ignoring the Need for a Post-Divorce Financial Plan

Finally, a divorce decree divides the past and present on many levels. Nevertheless, your financial life continues long after the end of a marriage dissolution proceeding. Among commonplace divorce financial mistakes, a good number of people walk away from the process without a clear strategy for rebuilding their financial lives. Even what seem like minor missteps can have seriously negative consequences into the future. If you have questions concerning divorce, call the Law Offices of Peter Van Aulen at (201) 845-7400 for a free consultation.