Three Divorce Mistakes to Avoid
1. Winging it.
You need to understand what you are doing so that you can protect yourself during the divorce process. There are three key areas that you need to firmly grasp BEFORE you proceed.
a. Your legal rights. This will vary depending upon the state you live in, but an internet search in your state will give you the basic information you need to get started. In fact, DivorceSource has links to the divorce laws in all 50 states. The internet, however, is not a good substitute for a consultation with a local attorney or mediator (who is also legally trained and financially literate).
b. Your complete financial picture. What does the debt look like? What are the assets that will be on the table for division? You need to lay out all the pieces of your financial puzzle so that you can completely understand where you stand now and what there is to bargain with.
c. Future implications. Once you know your financial situation, you need to determine what your goals are. You need to figure out what your expenses will be when you are single. You need to decide if you are planning for retirement, or just figuring out how to get by. There is also the consideration of the various tax implications depending on your settlement choices. What will your financial future look like as a divorced person?
2. Not Thinking Long-Term.
A settlement agreement is a binding legal contract. That means you must think about the future, not just the next six months or year. With very little exception, you will not be able change your mind about your settlement decisions once you sign the document.
It is imperative that you think through every aspect of your settlement. You need to feel that your agreements are reasonably fair, both now and into the future.
How do you know if it is fair? Compare the settlement to what you would have (most likely) gotten if you went to court. Though your standards of fairness might be different than the courts’ standards, that is really all you have to go on.
What is the best way to look at your settlement agreement for the long
term? Here are some examples:
a. Custody. If you are anxious to get out of your marriage, it can be tempting to give up important custody demands in the hope you can re-do the custody arrangements later. But judges don’t like to change things unless there are dire circumstances that warrant a change. Be comfortable with your custody decisions before your sign.
b. The House. If you want to keep the house, but it needs a lot of work, make sure your settlement includes money for repairs and upkeep. You also need to consider the potential for capital gains tax consequences down the road. On the flip side, if you are the one moving out, but are considering leaving your name on the house for a while (usually because your spouse will not qualify for a new mortgage), you need to understand that you will probably not be able to buy a new home until you are off that first mortgage loan.
c. Retirement Assets. If you want to retain all of your retirement assets in exchange for your spouse keeping other assets, you need to consider the tax implications of this type of settlement. Retirement assets are not the same as other assets because they come with tax burdens—even if you don’t spend them until you are older. Also, if you are considering giving up a piece of your spouse’s pension in exchange for money today, you need to know what that pension is actually worth (not an easy calculation to do without pension valuation software).
d. Alimony. If you want alimony, you have to know what your rights are, in your particular state, before you sit down to negotiate. You also need to think through how receiving the money could look. Maybe you qualify for alimony; but getting a lump sum of cash right now would be a better deal for you. Maybe you don’t quality, but your spouse is super-sympathetic (or feeling guilty) and will give you a couple years’ worth of alimony to make sure you are ok (but only if you play the “nice card”!).
3. Skimming over the details.
When you’re eager to be done with it, it can be tempting to just touch on different topics rather than going into detail. This is a big mistake because you can’t go back later and add specifics. For example:
a. Custody: Be Specific. You need to lay out a specific parenting plan because, many times, people change once they are divorced. This is especially true when new spouses and children come into the picture. You need a custody arrangement that is specific in terms of days, times, and holiday schedules. Leave wiggle room for special circumstances, but don’t count on “working it out” later. If your kids are young, you have a long haul ahead of you.
b. Alimony: Modifiability: If your state allows for modifiable alimony, you will want to be very specific with those terms. You need your settlement agreement to be written so that there are no surprises down the road if either of you want the alimony amount or duration to be modified.
c. Life Insurance. If you or your children are counting on your ex for financial support, you need life insurance to help cover your expenses should he or she die. Make sure that is included.
d. Child-Related Expenses. Child support is not expected to cover all expenses related to your children. What happens when your kids need braces, college tuition, prom dresses? Make sure you have a detailed plan of how you and your ex will share all of the many expenses that come with having children.
e. Debt. Creditors are not parties to your settlement agreement. Even if
your settlement agreement states that your spouse will be responsible for 100% your credit card debt, the credit card processor does not care. If it is a joint debt, the credit card company will still come after YOU. If you do not pay, your credit will be ruined. If you do a balance transfer to
the responsible spouse, that will help you sleep at night.