Divorce is undoubtedly difficult from an emotional standpoint. It can, of course, take a financial toll on you, too – even if you’re not retaining an attorney.
Beyond the cost of filing a case in court, many couples struggle to untangle their joint finances during a divorce. If you don’t both have a clear picture of your assets, debts, and shared accounts, it’s easy to make some common financial mistakes during the transition process that can ultimately set you back.
As you analyze your finances to draft a settlement agreement with your soon-to-be ex-spouse, watch out for these pitfalls that many couples face during a DIY divorce.
1. Not fully understanding your marital finances
It’s important to understand exactly how much money you and your spouse bring in each month, as well as what your current individual and joint debts are. In addition, carefully look at your investments and benefit plans (401(k), IRAs, etc.) and savings accounts.
If your spouse has been managing your budget and you are not aware of all your assets, now is the time to get educated and gain access to all the financial accounts you currently share. Putting everything out on the table upfront is the best way to ensure that you reach an agreement that is fair to both of you.
2. Underestimating future expenses
Consider what your new “single” living expenses might look like once you and your spouse are no longer sharing a home and a bank account. What exactly does your income look like based on your salary alone, and how does it compare with your anticipated expenses? The key to help alleviate some financial distress after a divorce is to have a short-term and long-term financial plan.
3. Ignoring tax implications
Any divorcing couple should consider the tax implications of their split. If you had been filing your taxes jointly up to this point, you might be in for a shock when you switch back to the higher “Single” tax rate after your divorce. You may also see some tax liability on some of the marital assets you may gain in your divorce. In addition, you may need to negotiate which parent will claim a child or children as a dependent to make use of available tax credits.
Finally, if spousal or child support payments will be part of your settlement agreement, be sure to speak with a CPA or financial professional to understand how these payments might impact both of your future tax filings.
4. Assuming that ‘equal division’ is the fairest arrangement
Equal division is exactly what it sounds like: marital property is divided evenly between the divorcing parties. However, equal division is not necessarily fair, as an asset’s actual value does not always match its current market value. You should also consider the source of any down payment made towards the purchase of a marital home, such as one spouse using his or her proceeds from the sale of a premarital property or using a gift of money from his or her parents. It may also be helpful to review your home’s tax basis, present value and transaction costs. Consulting with an experienced realtor, appraiser or CPA could be helpful to both spouses in making decisions about whether to sell or work on a buyout scenario between each of you.
5. Fighting for assets you can’t afford
Sure, you might want to keep the marital home, but can you afford to maintain it on a single income? If you can’t, you are only hurting yourself in the long run.
Remember that your marital property doesn’t all have to go to one person or the other. In some cases, it may be most beneficial for you and your spouse to sell certain assets and divide the profits you make from them. Another strategy might be considering waiving your claim to an asset of your spouse, such as retirement or investment account, in order to obtain 100% equity and control of another joint asset such as a marital home or a closely-owned business operated by one of the spouses during the marriage.
Avoid common financial mistakes during your DIY divorce by hiring a legal coach.
Going through a DIY divorce? My Legal Case Coach offers ongoing case coaching to assist you in making decisions about the best approach to drafting a settlement agreement with your spouse as well as Virginia specific form packets you can use to draft an interim (or partial) settlement agreement or a full and final full settlement agreement, and, when ready, completing the forms needed to finish your uncontested divorce.
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Get started by scheduling a free 15-minute consultation with us to discuss your circumstances with a licensed Virginia attorney and find out if our DIY legal coaching service is right for you.