I thought the first thing I should post here was the typical “5 7 10 15 1,387 Common Financial Mistakes In A Divorce” piece. This was the first time I had ever tried to write down, much less in order, what I’ve seen and heard. Clearly 1,387 is entirely too many—even in today’s list-driven world. So instead I’ve listed the major categories to start you thinking, and I’ll write follow-ups for each category.
The two biggest mistakes are the universal assumption that assets are divided 50/50 and the custodial parent (usually the mom) gets the house. If the parents are both dedicated to keeping the children in the marital home until they move off to college, why shouldn’t the non-resident parent make a sacrifice to keep the children there? The house has extra cost, and an extra allowance for that is quite reasonable.
There’s no requirement to sell a marital home immediately, either—a divorce can be granted and the house sold some time in the future. The bonus mistake: assets accumulated during the marriage are marital assets unless acquired in a specific fashion and kept segregated. This is a very complicated matter full of caveats and ‘except these seven state’ rules, so PLEASE get professional help to understand which assets are marital and which are non-marital.
Just like marital assets, there is marital debt. All the debt accumulated during the marriage can be seen as marital debt, regardless of whose name is on the debt. This liability may extend during separation, and oftentimes after divorce, regardless of what your divorce decree says. Let me repeat: REGARDLESS of your decree! And in case you think you can defend yourself by saying ‘My spouse accumulated that debt after separation’ ask yourself if you have a legal document that will be supported by your state’s laws and be accepted by the creditor—very rare. There are exceptions if you can prove the debt was in retaliation, but be careful.
Most people see that and think “Yes—I need to get my own home and auto insurance” and while that is true, that isn’t the end of it. If your soon-to-be-ex-spouse will be paying you alimony or child support, what happens to those payments if your ex-spouse is killed in a car accident? If your child support is based on a calculation of incomes, what happens if your spouse becomes disabled and his/her income goes to zero? Who should own any policy that protects against these liabilities? There is a lot to consider when talking about divorce, life insurance and beneficiaries.
Entire books have been written about this topic. Let’s try to focus just on finances here—do you have a budget? Where will you live? Those two topics will stop almost any progress towards completing your divorce, and if not addressed adequately before your divorce, will derail any attempt at restarting your financial progress.
Presuming you have an accurate budget and listing of marital and separate assets and debts, you can examine and determine an equitable settlement for alimony and/or child support. Many states use their own rules or formulas, some states use other states’ rules or formulas, and some just let the couple or judge work it out.
No matter how you get started, looking at month one is NOT how you finish! It doesn’t take very much math for you to plot out what your finances will look like 5 years down the road. Now do the same for your spouse (don’t act like you didn’t do that as part of your month one calculation!) and compare—did one of you have great success and the other fail? That doesn’t sound like an equitable settlement.
OK, so this isn’t really a financial topic, but there’s no way you can address the complexities of an overwhelming financial change then be faced with a new personal reality which brings an entirely new financial reality with it if you are the slightest bit distracted or distraught. If you’ve ever heard the phrase don’t make a decision on an empty stomach, don’t agree to divorce demands if you’re emotionally exhausted. Too many just capitulate and give in to unreasonable demands ‘just to move on.’
So many times people make it all the way through the list and get caught by emotions. This is exactly why I recommend hiring a professional—somebody who understands what right looks like, and will hopefully do everything possible to keep you from making a bad emotional decision. A professional will also have tools that will help you project that five year look, will understand the ins and outs of insurance, and have the ability to understand the deep math behind assets and debts (and interest rates and taxes and…).