Financial Victims in Divorce
Often divorce settlement mistakes may have their antecedents in decisions made before the separation. The time to garner as much information as possible, including copies of important financial records such as account statements (e.g., savings, brokerage, and retirement) and all other data that relate to the marriage (e.g., checking accounts, charge card statements, tax returns) is often before the red flag goes up.
One of the biggest mistakes divorcing spouses make is being in the dark about their finances. Very often women – particularly stay-at-home mothers who deferred to their husbands – go into a divorce knowing little about the marital finances. If the husband always handled all of the financial decisions in the household and the wife does not have any information about her husband’s income and assets, he has an unfair advantage over her when dividing the marital estate in a divorce settlement.
Here are eight considerations to keep in mind even before the heavy lifting of divorce negotiations begins.
1. A Mediator Does Not Protect Financial Interests
A mediator is an impartial divorce specialist who works to help couples reach an "equitable" settlement. "The primary goal of the mediator is to get a settlement. And any settlement means the mediator has done his or her job," says Susan Carlisle, a Los Angeles area CPA who specializes in family law. "Although the best mediators do their [best] to get the settlement as equitable as possible, it's your job to negotiate well for what you need and want. The mediator can't do that for you." That’s why mediators recommend that each spouse retain an attorney.
However, when the two spouses can work together to reach a fair settlement, mediation to resolve the terms and conditions of the divorce can save thousands of dollars in legal fees, not to mention mental anguish and emotional aggravation. Mediation involves a neutral but experienced family law attorney trained in negotiations who helps the couple achieve consensus about the terms and conditions of their divorce. Mediation is completely voluntary; the mediator does not judge, or insist on any particular outcome or agreement.
Mediation also provides divorcing couples flexibility, in terms of making their own decisions about what works best for their family, compared with the traditional adversarial legal process, where a judge makes the decisions.
2. Hiring the "Best" Lawyer That Money Can Buy
Hiring a high-priced, go-for-the-throat lawyer may appeal to the impulse for revenge. "People generally think that the more expensive a lawyer is, the better they must be. This is not always the case," says Jonathan Blumenthal, a certified financial planner and senior vice president of Peak Capital Investment Services.
Sometimes people want a divorce powerhouse simply to get back at a spouse, or to prolong the process, or to simply "win" at all costs. "That strategy works really well for the big gun [attorney] but not well for the person getting divorced," says Carlisle. "Unfortunately, lawyers make a living off people's insecurity, pain and desire for revenge. But it almost never works."
In cases of a complicated marital estate, a qualified lawyer helps a party avoid a lot of the common divorce settlement mistakes; but hiring a man-of-war is a very bad idea for two reasons. First, except in extremely egregious cases, judges do not punish a person for being bad. Second, hiring an attorney to punish a spouse increases the number of hours the lawyer must spend. Increased attorney’s hours means higher divorce costs, and higher divorce costs means there will be fewer assets and cash left to divide.
The best approach is to think of divorce negotiations as a business deal.
The resolution may lie in collaborative law, a process that lies somewhere between mediation and litigation. When couples collaborate, two attorneys and the spouses commit to not going to court, even though each spouse nevertheless has a lawyer.
"I think you definitely need representation when going through a divorce," Blumenthal says. But his advice is to take the time needed to interview several attorneys to find the right fit - someone qualified and affordable.
3. Joint Credit Cards and Loans
The couples that call it quits need to separate their finances ASAP. At the same time each spouse must try to save money during the divorce. This means they need to close joint credit cards. With joint credit cards, each spouse is 100% financially liable for debts incurred - even if the other person racked up the bills. Additionally, says Blumenthal, "even if your divorce starts out cordial, things can change quickly when people go into survival mode." A cash-strapped or bitter ex-spouse may start running up credit card debt, suddenly stop paying bills, or begin incurring joint financial obligations.
Any debts that one spouse takes on as a result of the divorce, but that remain in the other spouse’s name could ultimately affect a credit rating. If one spouse defaults on any of these accounts, the other spouse’s credit suffers.
4. The Family Home
Hanging on to the family home, while it may be appealing, can be a mistake both financially and mentally, experts say. "Financially, you better make sure you have the income to support the family bills and the household," Blumenthal cautions. "Mentally, going through a divorce is one of the most difficult things someone can go through, and staying in the family home makes it very difficult to move on."
Still, many divorcing people, especially women, are adamant about keeping the family home because the house becomes an emblem of all that was and is not more. The home is a habit of the heart and a state of mind; the house is a building on a piece of land.
Women worry about disrupting the kids. "But kids are flexible," says Carlisle, who has consulted in more than 400 divorce cases. "It's important to try to keep the kids in the neighborhood where their friends are and where their school is," she advises. "But that doesn't mean keeping up an expensive home you can't afford."
Being emotionally attached to a house in divorce negotiations can lead a person into a financial quicksand pit. Often, a divorcing spouse does not realize that he or she cannot afford the home they bought together during the happier times of the marriage, yet still may fight tooth and nail to keep it, sometimes at the expense of retirement planning.
However, the death dive of the housing market makes it abundantly clear that homes have a very low return on investment and, in some cases, have a negative return. Many houses today are still underwater, and couples have had to walk away from their homes and the hard-earned money they invested. In addition, a house is a money pit (e.g., mortgage payments, property taxes, repairs, and utilities.
In negotiations, the main focus is ensuring enough cash for living expenses after the divorce and in retirement.
5. Trying to Maintain the Exact Same Lifestyle
Divorce makes most people poorer. Family vacations, meals out, tennis lessons for the kids - all these and more may disappear in the wake of a divorce. "There are now two households to support," Carlisle says, which will greatly impact the family's finances. "Trying to maintain the status quo will only stress everyone, especially the parents."
6. A Weak Property Settlement Agreement
A divorce agreement – sometimes called a property settlement agreement or a marital settlement agreement – blueprints the post-divorce world of the formerly married. Who gets the house, who keeps the good china, when do the kids visit and for how long, how the investments are divided, who pays alimony or child support to whom and for how long - all these and more are spelled out in the marital settlement agreement.
Problems happen, however, when the agreement fails to account for any host of potential issues that not only may arise but are almost guaranteed to come up. For instance, if there's a "change of circumstances" – say, the kids' needs change dramatically, or one party makes a lot more or a lot less money – in most states, either side can go back into court and ask to either receive more financial support or pay less financial support.
The ink is barely dried on many divorce agreements, says Carlisle, "before someone is back in court, demanding a change to the agreement."
7. Failing to Change a Will and Insurance Policies
Sometimes, people simply forget to change these documents. Other times, they think "I'll get around to doing it later."
Well, it can cause plenty of problems if one spouse remarries – and Carlisle says divorcing men typically remarry within two years – and then that person passes away. The first spouse gets all the money, and the new spouse might be left in the cold.
"When you go through a divorce, you need to make sure you go back and change all your beneficiary information on all accounts and policies," advises Blumenthal. "Regardless of what you have in your will, if your ex is still the beneficiary of your IRA, for example, that will supersede your updated will."
8. Alimony Arrangements Should be Open-Ended
No one should agree to an end date for spousal support or alimony if law does not require it. No one can see how long into the future he or she will need spousal support.
Useful Online Tools
Separation Agreement Software
Resources & Tools
DIVORCE AND HEALTH INSURANCE -- Courts require parents to provide medical insurance for their children when the spouses have access to insurance. If neither spouse has health insurance, the custodial parent should ask that the insurance cost be factored into the amount of child support paid.
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