Five More Common Financial Mistakes to Avoid During a Divorce

By March 4, 2021Divorce
financial mistakes to avoid during divorce

1. Not evaluating settlement proposals from your actual financial perspective. 

There are two perspectives that a client considers when evaluating a settlement proposal. First, what am I entitled to under Missouri law? Second, what does this settlement offer provide me financially? Many divorcing spouses get caught up in the emotion of the case and make the mistake of focusing exclusively on what he or she is entitled to under Missouri law. Your divorce attorney should make you aware of your rights and what you may be entitled to pursuant to Missouri law. However, if you look at the big picture, what does this settlement offer provide me financially is actually just as important. The answer to that question allows you to determine if you can afford to settle the case under the terms being offered. If the answer is yes after completing this settlement analysis, then you will feel much more comfortable saying “yes” to the offer if you know you will be fine financially. 

2. Relying on the internet to value the house.

Zillow, Redfin, Trulia, and Realtor.com are great resources to get a general idea of how much your house is worth. However, it is just that – a general idea – as none of those sites have viewed the interior of your home to know how it actually compares to any home that has recently sold in your area. If you look at the estimated value of your home on all of these online real estate sites, you will quickly see how much they differ. These sites are simply using a computer algorithm to estimate the value of your house and this can lead to inaccurate values. If you want an accurate value of your home, based on information on the characteristics of your property and sales of comparable properties in your area, hire a real estate appraiser or have an experienced realtor prepare a comparative market analysis (CMA).

3. Not considering tax implications of the property being received.

This is a big mistake and you should speak with a tax professional about the tax implications of the property being awarded to you in a divorce. In general, transfers between spouses or former spouses related to divorce are tax-free. The IRS provides guidance on requirements for a transfer to be considered incident to divorce.

Before you say – if the transfers are tax-free, then why do I need to worry about taxes – let’s look at an example as to why you need to speak with a tax professional. In this example, you and your spouse agree that your spouse is keeping a $500,000 house and you are keeping a $500,000 retirement account. On first review, you are each receiving $500,000. However, when you touch your $500,000 by taking a distribution, your distribution is taxed to you as ordinary income. If we assume you are in the 24% tax bracket, that means you are only receiving 76 cents on the dollar. So, with that in mind, your spouse received a $500,000 house and you received $380,000 after paying federal income tax. This is simply one example and your entire property division should be reviewed with a tax professional that understands the nuances of divorce taxation to avoid making any financial mistakes.

4. Not requiring your spouse to remove your name from the mortgage.

If you’re on the mortgage, then your credit is at risk. In the lender’s eyes, it doesn’t matter that the settlement agreement says that your spouse is solely responsible for the mortgage. If your spouse misses payments, you’re on the hook and your credit could be affected. There are three ways to be removed from a mortgage. First, the house is sold and the mortgage is paid in full at closing. Second, your spouse keeps the home but pays the mortgage off in full at divorce from assets awarded. Third, your spouse refinances the mortgage or completes an assumption through your current lender to have your name removed from the mortgage. 

5. Not considering the cost/benefit analysis of your decisions.

I’m not saying that you should roll over and accept whatever your spouse proposes as a settlement. But I am saying that you need to weigh the costs involved in not accepting the offer. Don’t make emotional decisions or try to use your divorce to punish your spouse for their wrongdoings. Instead, work with your attorney so you have a good understanding of the likelihood of the possible outcomes if you go to trial along with the anticipated cost of litigating those issues. You should also add in the emotional toll that litigation can take on your mental health and your children. Then compare that cost with the value of the financial settlement offer you received from your spouse when you decided a trial was in your best interests. Once you have a good grasp of the cost/benefit analysis, you can make an informed decision on how you want to proceed.

Should you need the advice of a divorce attorney or have questions or concerns about your situation, know that we are here to help and discuss those issues with you.