6 Top Divorce Mistakes to Avoid at All Costs

6 Top Divorce Mistakes to Avoid at All Costs

Regardless of whether you feel as if you've hit bottom or you see the dawn of a beautiful new day--and life--on the horizon, divorce is a process of major transition. It will test your patience, your compassion, your sheer strength and even your sense of self-worth. And having children could make it even more challenging.

Thankfully, you're not treading virgin ground here. The divorce process has been well-vetted, and the potential pitfalls have been mapped. To help you through the transition, here are six dont's to avoid--and correct--before it's too late:

1. Don't assume that you have to use a pricey attorney.

What we mean: If your estate is simple, and the divorce is amicable, consider using a mediator instead of an attorney.

Why: Attorney fees can quickly escalate, potentially drawing you into debt. Plus, attorneys can turn what began as an amicable divorce into one rife with hostility.

How to avoid it:

    1. Look into hiring a mediator first. Contact different attorneys and mediators in your area and ask how they charge.
    2. Discuss the details of the divorce with your ex and work toward a mutually satisfactory agreement.
    3. Consider your financial situation--income, health insurance, retirement plans--and research the laws in your state regarding divorce. Understand how you will be financially impacted once you are divorced and aim to protect yourself while also being fair to your ex.
    4. Talk with your financial planner about dividing your assets before meeting with an attorney. If you have significant assets, seek out a certified financial divorce specialist (CFDS) who can make sure that assets are split in a way that is most beneficial to both parties.

    Already made this mistake?

      1. Only call your attorney when absolutely necessary. (The bill rises every time that your lawyer picks up the phone.) Also, aim to schedule appointments and bring a list of questions with you.
      2. You can always change your mind and terminate an attorney-client relationship. Just be sure to review any documents that you signed to understand what, if any, fees you may owe.
      3. Remember there's more at stake than just money. It may not be worth a lifetime of hostility and bad feelings to try to take your ex for everything he or she is worth by going the expensive lawyer route.

      2. Don't neglect to account for the tax implications of child support and alimony.

      What we mean: Child support and alimony, or spousal support, both provide financial support, but they are treated differently when it comes to taxes. Who claims which children also carries tax implications that need to be understood in the context of your situation.

      Why: If you provide child support, you can't write it off on your taxes, and your ex gets tax-free income. On the other hand, if you provide spousal support, you can write it off and your ex must pay taxes on the amount. Further, the person who claims the children--you or your ex--can have a huge impact on your total tax bill, as well as on your ability to qualify for tax credits, like the earned income tax credit (EITC) or the child tax credit.

      How to avoid it:

        1. Make sure that both you and your spouse's assets and salary are accurately displayed in the divorce decree.
        2. Know in advance whether receiving or providing alimony and child support will increase or decrease your tax bill.
        3. Talk to an accountant about the impact that not claiming children will have on tax credits and deductions.
        4. Make sure that a set schedule is outlined in the divorce agreement for who gets to claim the children.

        Already made this mistake?

          1. If you've signed the divorce settlement, find out from your accountant how your agreement over alimony, child support and claiming your child on your tax return will affect your taxes.
          2. Create an addendum to the divorce decree that outlines who gets to claim which children, and how often.
          3. Get yourself on a budget and commit to it so you're ready to pay any increase in taxes, as well as maximize your use of any tax refunds coming your way.
          4. Maximize the tax credits and deductions you do qualify for.

          3. Don't neglect to account for the tax implications of real estate.

          What we mean: Many couples own houses together and they're used to deducting the interest they pay on a mortgage on their tax returns. (Find out about taxes for homeowners here.) By not thoroughly considering the value of this deduction, you could lose it--and face a much bigger tax bill.

          Why: The spouse who gets the house and carries the mortgage will also get a sweet tax deduction in the form of the mortgage interest. They'll also be able to deduct the amount paid in real estate taxes, which further reduces taxes. However, if the home is sold, both deductions will be lost entirely. Don't be too quick to give away these deductions, especially if you're in a high tax bracket or if you'll be losing other deductions, like the ability to claim dependents.

          How to avoid it:

            1. Complete a mock tax return based on your new filing status with and without the mortgage interest and real estate tax deductions to see how much you have to gain or lose--or speak with a CPA. Know the value that property-related tax deductions have for your ex, as well.
            2. Include the value of these deductions in negotiations.
            3. Consult with your CPA if you own any real estate together to see how your taxes will be affected.

            Already made this mistake?

              1. Consult a CPA or figure out how much you'll owe this year, so you can better prepare for an increased tax bill.
              2. Adjust your withholdings to take more out of your paycheck, so you can pay down a larger tax bill throughout the year, as opposed to when you file.
              3. Offset the lost deductions with other deductions. For example, you could donate unneeded or unwanted property, which could take a significant chunk off your tax bill. Just be sure to retain receipts and a thorough record of what you donated.
              4. If it makes good financial sense, consider purchasing instead of renting a new place of residence. By taking out a mortgage on a property, you'll once again have mortgage interest and real estate taxes to deduct.

              4. Don't hide assets--and make sure that your spouse doesn't either.

              What we mean: Some people will go to extreme means to make it seem like they have less money than they really do in order to hurt the other spouse or to retain money for themselves.

              Why: It is unethical and illegal, and if the judge finds out, the offender will face serious repercussions. If your spouse gets away with this, you'll lose out on assets and monies to which you are legally entitled.

              How to avoid it:

                1. Play by the rules. Report all salaries, assets and income as required by law. Don't hide cash in a safe deposit box, create phony debt, transfer stocks or overpay creditors or the IRS.
                2. Take steps to identify whether your ex is hiding assets: Examine all financial statements (both joint and those belonging to your spouse), including debt statements, bank statements, brokerage accounts and pay stubs. Look for large purchases, overpayment of debt, transfers of funds and anything else that looks suspicious or unusual.
                3. If you haven't filed for divorce yet--do so ASAP. This will limit what you and your spouse can legally do with collective funds and property until the divorce is finalized.

                Already made this mistake?

                  1. Get your assets back out in the open, and report them. If assets are found after the divorce is final, the judge can give them entirely to your ex--and you could face jail time.
                  2. If you suspect your ex may have hidden assets, search for them and report your suspicions to the court.

                  5. Don't neglect to properly value assets, and make sure that you can afford payments on any debt you assume.

                  What we mean: "Getting" the house may seem like a good deal--unless that home is saddled with high mortgage payments you can't afford, steep utility or repair bills you can't pay or it's worth less than the mortgage owed. Likewise, a car that has a high monthly payment or requires extensive repairs could be a financial burden instead of a boon.

                  Why: Divorce is, in part, about splitting assets equitably. If what seems like an asset is actually a liability, that's simply not fair to you. It could drive you into debt, compromising your financial situation for years. On the other hand, if your spouse owns a business that isn't independently and properly valued, you could walk away from a financial interest that is rightfully yours.

                  How to avoid it:

                    1. Make sure you have the financial wherewithal to take on any property that has significant upfront or future costs involved.
                    2. Hire a valuation expert to review your situation and assets.
                    3. Be certain that the debt attached to an asset doesn't exceed its value--or make sure that you're compensated appropriately if it does.

                    Already made this mistake?

                      1. Consider renting or selling the house and downsizing if you can't afford payments.
                      2. Trade in an expensive car for a more affordable model, and don't forget to calculate the cost of gas into what you'll save.

                      6. Don't forget to update your beneficiary information on all financial accounts.

                      What we mean: Be sure to update the beneficiary information on wills, brokerage accounts, retirement accounts, insurance policies and pensions.

                      Why: Even if you remarry, your ex will be entitled to insurance or retirement account proceeds if he or she is still listed as a beneficiary.

                      How to avoid it:

                        1. Thoroughly review your entire financial portfolio, identifying beneficiaries on every account to see where your ex-spouse still appears.
                        2. Contact all pertinent institutions to make the appropriate changes.
                        3. Follow up and ask for written documentation of your changes.

                        Already made this mistake?

                          1. You can amend this at any time. Simply follow the steps above.
                          2. Keep in mind that you are required by law to drop your spouse from your employer-based health insurance coverage within 30 days of the finalization of your divorce.

                          Last but Not Least

                          It goes without saying that divorce--for most--is a time that's rife with emotion and pain. In order to come through it intact financially and emotionally, you must focus on your goals, where you're headed (not where you're at now)--and what it will take to get you there. Empower yourself now by taking the proper financial steps to anchor your future.

                          Holly Mangan is the managing editor for Money Crashers Personal Finance, a resource for budgeting, smart shopping, taxes, investing for retirement and more.


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