Common Financial Mistakes Made During Divorce

January 29, 2013

Common financial mistakes made during divorce

It is no secret: divorce can be expensive. However, many people compound their financial woes by making grave mistakes during the divorce process that result in unfair settlements, gross hardship and a financial situation that could have been avoided at the outset by being more knowledgeable about the issues to look out for.

The following article provides a brief introduction about what financial mistakes to avoid during a divorce.

Accepting illiquid assets unknowingly

One common mistake is a failure to learn about the liquidity of the marital assets being divided. Just because two spouses each get the same number of assets, does not necessarily mean that the split is even. This situation has to do in part with one spouse's share being more liquid than the other's.

Liquidity refers to a person's ability to use a particular sum of money in the present day. A house is an example of an illiquid asset, whereas a savings account or a retirement plan are examples of liquid ones. Thus, a spouse may be offered, and unknowingly accept, illiquid assets that cannot pay his or her current bills.

Tax implications

Another common mistake is failing to consider tax implications of the settlement. Because different assets are taxed differently, their valuations ought to be adjusted to account for this. For example, capital gains are taxed differently than assets taxed like income. A capital gain is defined as the fair market value of an asset minus its cost. Such tax implications can also extend to retirement accounts, so knowing the rules of these accounts is important.

Debt issues during a divorce

Another common mistake is failing to address the debt situation at the time of divorce. Creditors do not have to abide by how the separation judgment appoints responsibility for joint obligations like car loans or a shared credit card and can go after either spouse to collect. Therefore, it is vital to pay off and close all joint accounts before the divorce decree and open new ones solely in each individual's name.

Alimony and child support

Alimony and child support should also be handled with care, and settlements should not include hard and fast end dates for such payments. Instead, the settlement should provide for a date on which the necessity of those obligations can be reassessed. In cases where an insurance policy must be taken on alimony or child support payments, the beneficiary spouse should ensure that he or she is either the owner or irrevocable beneficiary of that policy.

If you are considering divorce, it would be wise to explore in detail these and other issues with an experienced divorce attorney.

Article provided by Law Office of Lauren Cain
Visit us at http://www.collin-county-divorce-attorney.com