QUESTION: “What are the most common financial mistakes people make during a divorce?”
Your divorce agreement will help determine your future financial security. Our Philadelphia divorce attorneys have listed ten of the most common financial mistakes made by divorcing spouses and tell you how to avoid these mistakes.
- Failing to consider legal fees: Divorce can be expensive, especially if you and your spouse can’t agree. Make sure that you are budgeting for legal fees as well as your change in lifestyle.
- Failing to create a post-divorce budget: You may know how much you earn each month, but do you know exactly how that money is spent? Make a list of all of your expenses, and use that list to develop a realistic monthly budget. When considering the cost of your future living expenses, take into account. If you ignore inflation, you may find that you cannot maintain your quality of life.
- Making promises that you can’t fulfill: You may feel guilty about the divorce, so you agree to make larger child support payments or to pay a lump sum to your spouse. Make sure that any promise you make can be fulfilled; reneging on a written promise can lead to lawsuits and legal penalties.
- Keeping the family home: Parents often believe that it is best for the children to stay in the family home. But, keeping the home may not be the best financial decision, especially if you have a reduced income. Before deciding to keep the home, make you can afford it. If you don’t earn enough to cover the mortgage, property taxes, and routine maintenance, you could end up losing the house.
- Failing to understand your liability for unsecured debt: If you or your spouse incurred credit card debt during the marriage, that debt may be a shared liability – even if your name isn’t on the card. When you settle your divorce, you must divide responsibility for marital debts. However, credit card companies don’t care don’t care about the wording on the divorce settlement. They will consider both of you responsible for payment. If you can’t pay off all debts before the divorce becomes final, make sure that your name is taken off any joint accounts.
- Not taking ones name off joint accounts: Make sure that you take you name off all accounts. You don’t want to be responsible if your spouse runs up new credit card debt or if he doesn’t make his car payments.
- Deciding one financial issue at a time: Who is going to keep the house? Who will get the investment income? How will the retirement accounts be divided? Each financial decision may have an impact on other areas. When you consider one asset or source of income at a time, you miss the big picture. Look at your complete financial picture before dividing assets.
- Assuming that equal division of property is fair division of property: Not all assets are created equal. Your home may be worth $400,000, but is it really worth its market value if you can’t sell it? Agreeing that each spouse will receive property of equal monetary value does not mean that they each have the same access to the money. When dividing property in a divorce agreement, one should consider whether assets are liquid or illiquid as well as tax basis, present value, and transaction costs.
- Failing to insure your child support and alimony payments: What will happen to your alimony and child support payments is your ex is seriously injured or killed? You may request that your spouse obtain disability and life insurance policies that ensure that alimony and child support payments continue in the event of his or her disability or death.
- Failing to consider long-term financial security: If you focus only on the immediate task of splitting assets and getting alimony and child support, without understanding how things might look in 10 or 20 years, you’re doing yourself a great disservice.
It is often a good idea to hire a financial planner to review your Pennsylvania divorce settlement agreement before you sign it. The financial planner will be able to warn you of any long-term financial consequences. To learn more about working with a financial planner during your divorce, contact Petrelli Previtera at 215-523-6900.