Divorce is difficult enough as it is: pay attention to this advice to avoid financial difficulties accompanying your new relationship status.
This probably comes as no great shock, but divorce can be expensive. There are attorney’s fees, court costs, child support, alimony, and any number of additional expenses. For the most part, these are all obvious, expected parts of the process. You likely anticipate these expenditures and more. Still, there are a number of less apparent costs to divorce, things that can seemingly come out of nowhere and blindside you.
Ending your marriage can have a huge impact on your financial future and your long-term economic well-being may hang in the balance. Here are a few pitfalls to look out for and a few ways to safeguard your interests.
Not only will your filing status change drastically after a divorce—you’re no longer married after all, hence, you can no longer file as a couple—but there are other tax factors to take into account. The division of property can have a substantial and unexpected impact in this area.
Capital gains taxes can come into play following your divorce settlement and may show up anywhere from real estate transactions to investments and beyond. At the same time, not all property is created equal in this regard, and various assets may be treated differently.
For example, the sale of a principal residence may not necessarily be taxed depending on how much gain exists—there’s a cap gain fee for individuals as well as couples, which varies from state to state. On the other hand, if you withdraw money from a retirement fund like an IRA, 401k, or pension, you may be taxed the full rate.
Another realm that often flies under the radar in divorce is how it can impact your credit. Once your marriage is dissolved, your ex’s financial doings cease to have any impact on yours. Both parties will apply for credit cards, loans, and the like as individuals, and you will be your own economic entity. That’s fantastic, but depending on the situation, your former spouse can still influence your wallet.
Getting a divorce doesn’t automatically change any pre-existing agreements you and your ex entered into as a couple. If you have a mortgage, a car loan, or amassed any shared debt during your marriage, you’re still on the hook for that.
Ideally, these concerns will be addressed in your divorce settlement. The court may order one of you to pay a joint debt, and in a perfect world, that’s precisely what will happen. But as you’re probably well aware, we don’t live in a perfect world. If your spouse is ordered to take care of a debt with your name attached, but doesn’t, it can negatively impact your credit and you may even wind up in collections.
The final agreement—whether it’s an arrangement you and your ex arrived at together or one that was handed down by the court—can include provisions for this type of situation. Your former spouse may be ordered to refinance a particular loan in his or her name alone by a specific date. Still, it never hurts to keep an eye out and make sure that this actually happens.
Changes In Living Situation
This probably sounds obvious, but you may be surprised how often people fail to account for the expense of finding a new place to sleep. Odds are very good that, by the time your divorce is finalized, you’ll already be living apart. Frequently these accommodations are transitory in nature and acquired in haste.
Moving forward, you may well want to set down more permanent roots, which can incur costs. This will vary depending on if you rent or buy, but there are deposits, down payments, and a bevy of other outlays to consider. Buying furniture and a new set of kitchenware can be pricey.
Even if you remain in the marital home, you may be faced with covering all of the bills from a single paycheck for the first time. If a suitable agreement can’t be reached, you may wind up selling a shared house. In these situations, assets may be sold quickly and with a mind for convenience rather than for optimal value.
Gaps In Health Insurance
Health insurance is not only important, you know, for your continued health and well-being in the face of illness and injury, but as it is now mandatory, you can incur substantial tax penalties if you are uncovered. If you were previously shielded under your spouse’s plan, after divorce you may be open to fines, or have to pay out of pocket for any medical care.
If you don’t have coverage through an employer, it’s possible to continue hanging onto your ex’s plan through COBRA for up to 36 months, though that can be expensive. You can also look into getting less expensive health insurance through the Affordable Care Act in your state. If this is your situation and you know that it’s coming, you may want to examine your options ahead of time and get everything sorted out by the time the final agreement is signed.
Guard Against Surprise Expenses
While these and other costs may blindside you during and after the divorce process, there are ways to safeguard your pocketbook and ensure you start the next phase of your life on sound financial footing.
One of the biggest missteps many people make in divorce is not budgeting. It’s way too easy to lose track of your expenses as they mount, and far too few people take the time and effort to set out a specific plan. And then you have to stick to this roadmap, which is a whole other hurdle.
Overestimating what you have and underestimating what you spend are common problems. When you pay for an attorney, shell out for court costs, cover the upkeep on your home, or even pay child and spousal support, it adds up quickly. Setting and adhering to a budget may be a pain initially, but it will serve you well in the long run.
You may also be leaving valuable assets on the table during the division of property. While some resources are easy to put a price tag on, like bank accounts or loan debt, others can be trickier. A car or house may be worth a specific dollar amount on paper, but when it comes to liquidating them, you may not always be able to get that much.
People also overvalue items that have emotional significance. How important these possessions are to us may not reflect a real-world value, and you run a couple of risks in these situations. First, you may spend a great amount of time arguing back and forth over an asset with relatively little monetary value. Second, you may agree to a less optimal settlement that doesn’t provide as much financial stability.
Before you sign any documents, take a step back, look at everything, and determine how much it’s all worth to you and where you’re willing to compromise.
Shared assets are divided up between the two spouses, but the court can only allocate what they know about. Hopefully, both parties are honest and trustworthy enough to be up front when it comes to declaring property, but that may not always be the case. Remember what we said earlier about this being an imperfect world.
If hidden assets are not divulged, it can impact the settlement, but there are ways to search for clandestine holdings. You can check recent tax records for inconsistencies, look at bank accounts for expenditures you didn’t know about, examine brokerage statements for stocks and bonds, and more.
Make sure your financial records are up to date and organized. Know what you have, what your spouse has, where money is owed, and gather as much information as you can. Not only will this streamline your side of the equation, it will make it easier to spot any irregularities from your spouse.
These are just a few possible pitfalls that can swallow up your finances and put a serious hurting on your financial status as you move forward with your life. Divorce is difficult, and it is an emotional time where you juggle any number of issues. Things can fall through the cracks if you’re not paying attention, and it will be in your best interest to be as focused and detail-oriented as possible. Your financial future may depend on your vigilance.