3 Money Mistakes Couples Must Avoid Before Divorce
The most important factor to discuss prior to divorce is not what happens during divorce, but what happens before divorce. What I am referring to, of course, is money. Money mistakes can be costly for both parties involved in a divorce. Even if you have a good asset portfolio and/or have built a great credit score, divorce can destroy your financial future if you haven't taken the necessary steps to protect your cash, real estate, and retirement assets. This article discusses three crucial money mistakes that couples must avoid before divorce...
Before you even consider calling a lawyer and filing divorce papers, you must first get your finances in order. While it may be tempting to rush through this process in order to put the financial aspects of divorce behind you as soon as possible, you must take your time.
Making errors now may cost you thousands of dollars later. The National Endowment for Financial Education (NEFE) conducted a survey of divorced Americans and discovered that the majority of them regretted how they handled their financial affairs during the divorce. Half of those polled said they wished they had been more financially prepared before divorcing. Furthermore, a whopping 70% said they wished they knew what to expect from their post-divorce finances.
Here are three commonly made money mistakes that couples contemplating divorce must avoid:
Not obtaining a copy of your credit report and fixing any errors on it before using it as a basis for settlement negotiations.
Your credit score is a key part of what you bring to a relationship, even if you don't have any joint obligations during your marriage. If you plan to buy real estate, take out a loan or get new credit cards after your divorce, lenders will consider your credit history alone (meaning not your spouse's). It's important to review your credit reports and correct any errors on them before agreeing to a settlement that might be based on inaccurate information.
You'll never get a fair settlement if you don't know where your partner’s money is, how much debt they have, or how much you may be entitled to. However, you can obtain free copies of your partners' credit reports from AnnualCreditReport.com. If you notice any errors on your spouse's report, make sure to have them corrected before using the report as a negotiating tool.
Not considering the tax consequences of any proposed financial settlement agreements before they're signed.
One of the most overlooked aspects of divorce is how it will impact your taxes in the future. Some people mistakenly believe that once they get divorced they no longer need to file taxes jointly. However, this is not true if they were married on December 31st of the tax year.
Another common error I see is that people do not fully comprehend the tax implications of their financial settlement agreements before signing them. They are concerned with how much alimony and child support they will receive or pay, without considering the tax implications of these payments. Alimony, for example, is taxable income if you receive it as part of a settlement agreement. Alimony payments made as part of this settlement agreement are tax deductible. The same holds true for child support: Payments received are not taxable income, nor are payments made tax deductible.
Further complicating this situation is that many taxpayers do not realize that for years 2018 through 2025 — due to a provision in the Tax Cuts and Jobs Act — alimony payments made under separation agreements entered into after Dec. 31, 2018 will no longer be tax deductible for the payer, nor will these payments be considered taxable income for the recipient.
Therefore, make sure you consider the tax consequences of any proposed financial agreements before they're signed.
One of the most overlooked aspects of divorce is how it will impact your taxes in the future. Some people mistakenly believe that once they get divorced they no longer need to file taxes jointly. However, this is not true if they were married on December 31st of the tax year.
Keeping secrets from your lawyer.
It is crucial to be open and honest with your attorney. In fact, you should disclose everything that could affect your divorce case.
You should never lie to your lawyer, but even if you don't come right out and make stuff up, there are things you may think are insignificant details that could make a huge difference in how much money you walk away with post-divorce. For example, let's say your spouse was the one who always handled the finances, so you have no idea what kind of retirement accounts are involved. If your spouse has a secret 401(k) or IRA account with $100,000 stashed in it — and you don't tell your attorney about it — that's 100 grand he/she can't fight for on your behalf.
An experienced family law attorney should be able to provide an estimate of your potential legal fees and other costs. You'll save money by keeping the lines of communication open with your lawyer and not surprising them with new information at the last minute.
Not closing joint accounts right away.
If you have joint credit cards or bank accounts with your spouse — and let's be honest, most couples do — the first thing you need to do is close them and open separate accounts in your own name. If there's a balance on a credit card, pay it off and close the account. If there's money in a joint account, take out half of it and leave the other half for your spouse.
You can't just start withdrawing money without their permission. Even if you're divorced, you're still legally responsible for any debt you incur together. The same is true for loans such as mortgages or car loans: you will both be responsible for paying the loan until it is paid off or refinanced in each person's name separately.
Also, note that I am not saying you should just close all the joint accounts immediately. There are potential credit score ramifications of doing this, and many times you will need money to pay lawyers and other related fees. Your best bet is to leave all accounts open until the divorce decree is finalized and the division of assets is complete.
You shouldn’t let the divorce from your partner put you in a financial trouble in the future. Also, avoid creating more problems for your-self by hiring a pro who can properly handle situations like yours.
