Financial Mistakes to Avoid in Your Divorce Settlement

Divorce is one of the most challenging periods in a person’s life not only due to emotional worries but also because of the need to make future-shaping decisions. Many of them are related to finances and require much attention, honest communication, and strategic planning. Financial choices made during a marriage dissolution have a direct impact on partners’ stability after divorce, so it is crucial to come up with a fair divorce financial settlement agreement, touching upon all important matters.

Keep in mind that a financial settlement covers much more than assets division. It is also necessary to consider child support, alimony, taxes, and all potential expenses that will appear after divorce. Unfortunately, some spouses misjudge the importance of these factors and possible consequences. With this in mind, we decided to describe the most common things often overlooked in divorce agreements and mention the potential outcomes of poorly made decisions.

Moreover, we will share information that can help you deal with the divorce process more confidently and efficiently and avoid possible costly mistakes. For more specific divorce finance advice, it is reasonable to contact an attorney.

Keeping the House at All Costs

One of the most frequent mistakes when negotiating divorce financial issues is wanting to get the marital home no matter what. Usually, people do so because they are emotionally attached to the place or because they feel secure in the house. However, it is important to try putting aside sentiments and think more strategically about property settlement in divorce.

Maintaining a house without a partner’s money input may be a huge financial burden that will drain your budget over time. You will be the only person responsible for paying mortgage, property taxes, insurance, utility bills, maintenance costs, etc. Besides, living in a house that is old and requires constant repair investments may be extremely expensive. For instance, solely the monthly upkeep expenses for a house in Indiana are approximately $400, on average, including such utilities as electricity, gas, and water. So, before you decide to keep a family house, answer several questions.

  • Do I earn enough to afford the ongoing expenses of owning a home alone?
  • Will I have enough money for my other needs?
  • Is there anything left for my desires?
  • Will I be able to save money for the future?

Sometimes, it is more advantageous to opt for a divorce house split. For instance, spouses can sell the house and divide the proceeds. By doing so, they can expect truly equitable distribution of this asset.

What happens to a house in a divorce if a couple has minor children and wants to create a secure environment for them without changing the place of residence? There is no universal answer. Some partners still adhere to the above-mentioned approach, while others decide on co-ownership or buyout of a house part by one spouse.

Misvaluing Marital Assets

It happens that spouses underestimate the value of joint assets either due to emotional challenges tied to a divorce, the desire to end the process faster, or simply due to the lack of legal knowledge. When preparing a marital settlement agreement, do your best to be attentive, accurate, and thoughtful.

Keep in mind that the concept of marital assets  is multifaceted. For instance, the list of joint assets can include real estate, investments, vehicles, retirement accounts, businesses, and even personal belongings. It may be difficult to determine the real value of every item if you lack the needed expertise and skills. That’s why it is reasonable to order professional appraisal or valuation services.

Experts will use specific techniques to estimate the worth of your property, paying attention to present-day market conditions, historical data, and any other relevant factors. Thus, you can be sure your agreement is fair and won’t cause any problems later. In case you feel reluctant to spend money on professional appraisal services and decide to divide assets on your own, you may regret it once your marriage is terminated. Remember that making a financial claim after divorce to restore justice can be more expensive and time-consuming than hiring financial experts when the case is pending.

Underestimating Your Post-Divorce Expenses

Once your marriage is officially over, you’ll have to adjust to new life realities, including your budgeting after divorce. Some types of expenses may come as a surprise, especially if you weren’t responsible for them during marriage. So, when drafting a divorce financial settlement, consider your probable earning capacity and financial needs when living alone.

Write down all the expenses that you will be responsible for. The list can include such basic points as:

  • Housing
  • Utilities
  • Transport
  • Healthcare
  • Personal spending
  • Pet maintenance

Besides, there may be additional expenses like legal fees, child support, or alimony. Remember to include them all in your calculations.

To approach financial planning after divorce realistically, you may track your spending habits for a couple of months during a divorce process when your partner no longer contributes to a family budget. Thus, you can better see which costs should be cut and how to alter your spending habits. Some divorcees seek consultation with a financial advisor to develop a thorough plan for managing finances after divorce. Consider this option if you want to establish a proper balance between your income and expenses.

Not Following the Rules for Splitting Retirement Accounts

Divorce retirement accounts, such as 401(k)s, deferred compensation plans, and ESOPs, can be recognized as marital property in Indiana, similar to other states. So, when splitting them, spouses have to abide by specific regulations and rules that vary based on the type of account and particular laws of the state where a divorce is filed.

For example, if partners need to divide a 401(k) account, they must get a qualified domestic relations order (QDRO) from the court, which outlines the division standards. If the parties fail to comply with the set protocols when splitting retirement accounts in divorce, there may be tax implications and penalties.

For instance, if you take money out of your retirement account before you’re 59 1/2 years old, you may have to pay a 10% fee for withdrawing before the due date. Or, if you don’t mention the splitting of a retirement account on your tax forms, you can face extra penalties.

If you aren’t sure how retirement accounts are split in divorce in your specific circumstances, it may be a good idea to consult an attorney or a financial advisor. Spending money on their assistance will pay off in the long run.

Failing to Consider Potential Bankruptcy Consequences

Divorce may be a very expensive process. In addition to obligatory court fees, spouses may also pay for third-party assistance, so the overall expenses can deplete their budget. That’s why, when negotiating the terms of a divorce financial settlement agreement, make sure to consider the potential bankruptcy after divorce.

Bankruptcy in the post-divorce life may appear for several reasons:

  • Spouse lacks the money to repay debts allocated during a debt-division process
  • Court-ordered alimony or child support payments can strain the paying capacity
  • Single income isn’t sufficient to maintain the same standard of living
  • Unequal distribution of assets may cause financial vulnerability
  • High divorce-related expenses provoke debt accumulation
  • Unforeseen events like unemployment, sickness, or disability destabilize the financial situation

When you’re working out a settlement where your spouse agrees to make future payments, it’s important to consider if your spouse may declare bankruptcy later to avoid making those payments. Remember that the effects of bankruptcy on the payments determined in a divorce settlement depend on the kind of payments and the specific type of bankruptcy requested.

  • Support payments. In general, child support and alimony are obligatory payments and can’t be eliminated through bankruptcy.
  • Payments for property division. Payments associated with property division may not be discharged if your partner files for Chapter 7 However, under Chapter 13 bankruptcy, your spouse can potentially avoid paying the debts pertaining to the property division.

If you think your spouse may declare bankruptcy, it’s best not to agree to repaying debts after divorce or postponing the division of your family home. In fact, if you have joint debts, it is worth cooperating to repay them before starting an official marriage dissolution procedure. Thus, you will experience fewer problems when managing your after-divorce finances. If your marital debts are big, you may file for joint bankruptcy before proceeding with the divorce to make the property division process simpler.

Not Thinking Long Term about Child Support

Child support obligations may evoke many conflicts between divorcing spouses even though there are clear guidelines for how much child support after divorce is recognized as a norm. Even when everything is handled amicably, parents can still make a serious mistake by concentrating on their kids’ immediate financial needs and disregarding their changes over time.

As children get older, the scope of their interests and demands expands. That’s why it is necessary to be flexible and cooperative when it comes to child support payments. In general, a non-custodial parent has to pay more for extracurricular activities, medical care, and higher education when kids grow up. It’s essential to negotiate child support with these future expenses in mind to avoid any conflicts or financial strain in the years ahead.

Moreover, when defining child support in a settlement agreement, it is recommended to clarify that decisions may be modified later due to changes in circumstances. For instance, parents can perform periodic reviews or use specific techniques for adjustments. Such a method is beneficial because if a supporting partner loses a job unexpectedly or has to deal with sudden expenses, ex-spouses will be able to find a solution without conflicts.

Some parents even create a separate fund for unforeseen expenses or emergencies to eliminate stress and maintain the financial well-being of children in any situation. The main thing is to elaborate on such a “financial cushion” in a settlement agreement so that both spouses understand how much they should contribute to the fund, how often, and when they can withdraw money from the account.

So, when negotiating divorce and child support obligations, it is vital to be ready to adjust to possible changes in the future.

Neglecting to Consider Taxes

When preparing a divorce settlement agreement, you need to consider several tax implications, which can be roughly divided into 2 main categories:

  • Tax-deductible
  • Non tax-deductible

Alimony/spousal support payments belong to the first group. Therefore, a partner receiving alimony payments needs to report that money as income on their tax return and pay taxes on it. The paying spouse can deduct the amount they pay from their taxable income. Thus, they can reduce their overall tax liability.

Child support payments are classified as non-tax-deductible payments.

Besides alimony and child support, the division of property and assets may entail tax consequences. For instance, if you obtain a substantial portion of your ex-spouse’s retirement accounts, you may face penalties and taxes if you withdraw those funds earlier than allowed. Similarly, if you sell property that you co-own with your ex-spouse, you may have to pay capital gains taxes on any profit made from the sale.

There are lots of intricate details when it comes to divorce and tax implications. Understanding them all for a person without specific education is rather hard. It is advisable to reach out to a tax professional. An expert will analyze your case, project possible after-divorce financial situation, inform you about your divorce tax filing status, and suggest viable methods to avoid unpleasant surprises when it is time to pay taxes.