Top 15 Financial Mistakes to Avoid in Your Divorce Settlement

Top 15 Financial Mistakes to Avoid in Your Divorce Settlement

If you are preparing to divorce your spouse or believe your spouse might be preparing to file for divorce from you, it's important to seek legal advice from a qualified divorce lawyer in New Jersey at Ziegler Law Group, LLC. The divorce process is complicated, with the possibility of mistakes abundant. Here are 15 common mistakes divorcing couples often make when they try to get divorced without obtaining experienced legal representation.

Top 15 Financial Mistakes to Avoid in a Divorce Settlement

1. Lack of Financial Documentation

After you file for divorce, you'll be required to exchange financial documents with your spouse so that both sides can obtain a complete understanding of their finances. If you don't make copies of your financial documents before you file, it can be harder to get the proper papers from your spouse once the divorce process has started.

You should gather the following documents and retain copies of them:

  • Two to three years of income tax returns
  • Bank account statements for the last 12 months (savings and checking)
  • Retirement account statements (for you and your spouse)
  • Investment account statements
  • Most recent bill statements and loan documents
  • Credit card statements
  • Credit reports
  • Copies of deeds and car titles
  • Mortgage statements
  • Photographs of contents within your safety deposit box

2. Being Unclear About Your Financial Situation

Not knowing your financial situation is one of the biggest mistakes you can make when preparing to divorce. This might be an issue in marriages where one spouse handles all of the couple's major financial decisions. If you think your marriage is nearing the end, get up-to-speed on your finances. Review bank account statements, W-2s, pay stubs, bills, and credit reports to understand what you and your spouse have coming in and going out.

Inventory all of the assets and debts you and your spouse have. Compile a list of your assets, and check the fair market values of each. For expensive items, you might want to have them valued by a professional. Once your divorce case has been filed by you or your spouse, you'll want to get an independent valuation by an expert of your choosing rather than relying on your spouse's valuation expert. Failing to understand your finances can place you in a position of not receiving the portion you should in your divorce.

3. Relying on Your Emotions Instead of Logic

Divorce is often filled with conflict and can be a highly emotional experience. You should avoid making decisions based on your emotions and should instead think logically about everything. A common mistake people might make when divorcing is to try to hold on to their marital home because of an emotional connection. However, you should think about whether you will be able to afford the maintenance and upkeep once you divorce. If you would need to refinance your mortgage, think about whether you would qualify based on your income alone and whether the payments would be manageable.

Another thing to consider is the capital gains tax exemption. When a primary residence is sold, a couple receives a $500,000 exemption. If you are the sole owner when you sell, you'll only be able to exclude $250,000 from the sales price. For example, if your home sells for $750,000, you and your spouse could exclude $500,000, leaving each of you with $125,000 to worry about paying capital gains tax on. By contrast, if you sell your home yourself, you'll be left paying capital gains taxes on the $500,000 non-excluded amount.

4. Not Considering Child Support and Alimony Enough

Don't leave the topic of child and spousal support out after negotiating the amounts. You should also consider the manner in which you will receive funds. Even if you settle your case, it's best to obtain a wage assignment order for both types of support. It's also smart to request your spouse obtain a life insurance policy payable to you to ensure you'll receive the support you need in case your ex unexpectedly passes away.

You'll need to arrange for immediate notification if your ex misses premium payments on the life insurance. Include the payment of the premiums in your settlement agreement. Make sure to memorialize child support and spousal support payments in a support order. This helps to prevent your ex from discharging them in bankruptcy.

5. Failing to Consider the Long-Term Financial Impact of Divorce

After your divorce, you will go from two incomes to one. You need to think about your post-divorce lifestyle and prepare to make changes. It's a good idea to work with a financial adviser early in your divorce process to understand how your divorce will affect your finances and create a new budget with your reduced income. Make cuts as needed, and ensure you include retirement savings contributions to protect your ability to retire on time.

6. Overlooking Tax Implications

Divorce can affect multiple areas of taxation. You should work with a tax accountant to understand the tax implications of different ways to divide your assets and work to minimize the total amount you and your ex might have to pay to the IRS following your divorce. While you won't have to pay capital gains taxes on assets that are transferred to you in a divorce settlement, you might if you decide to sell them later as previously described about the marital home.

7. Ignoring Retirement Accounts


Some spouses think it will be easier for each of them to keep their respective retirement accounts instead of dividing them. Others might decide for one spouse to withdraw money and pay it to the other spouse when that spouse doesn't have any retirement savings. These options are not feasible in many cases, and the second one could result in early withdrawal penalties and an unexpected tax burden. Dividing retirement accounts and pensions must be done correctly, and the rules for doing so are complex. Make sure to work with a divorce lawyer in New Jersey at Ziegler Law Group, LLC for help with correctly dividing your retirement accounts and to obtain sound financial advice for divorce settlement decisions.

8. Not Considering Post-Divorce Living Expenses

Both you and your spouse will likely need to downsize after your divorce since it costs more to maintain two separate households than one. A financial adviser can help you make projections to learn what you will need to support your current lifestyle and where you can make necessary cuts. Be prepared to downsize, and prepare a budget accordingly.

9. Rushing into Settlement Without Legal Counsel

While you might want to settle your case as fast as possible, you could place your long-term financial stability at risk by rushing into an agreement without the advice a NJ lawyer for financial settlement in divorce can provide. Even though you might think it's best to get things done as fast as possible, you might later regret making uninformed decisions.

10. Not Updating Beneficiaries on Legal Documents

Many people fail to think about their estate plans when they get divorced. If something happens to you, you likely don't want your ex-spouse to have power of attorney over your medical care and finances. You also probably don't want the proceeds of your life insurance to be paid to your former spouse instead of other loved ones. It is recommended to discuss these matters with your estate attorney and review your will, trust, power of attorney, advanced healthcare directive, and life insurance policies. Update the beneficiaries as necessary. Don't forget to change the beneficiaries on your retirement account, bank account, and others that your spouse is named on.

11. Failing to Consider Future Education

When you're negotiating child support, don't forget to consider your children's future educational needs. You can negotiate an agreement for your spouse to pay child support for your children's college education and include it in your settlement agreement.

12. Refusing Mediation or Arbitration

You might feel like going to a divorce trial will vindicate you. However, divorce trials are expensive to litigate, and there is no guarantee you will receive the outcome you want. It's much faster and less costly to try to settle your divorce in an alternative dispute resolution procedure like divorce mediation or arbitration. If you reach an agreement in divorce mediation, it can be memorialized and filed with the court. If you don't reach an agreement in mediation, you can still go to trial to settle any issues that remain outstanding. Decisions made in divorce arbitration are binding.

13. Taking on an Unfair Share of Marital Debt

Make sure you don't take on more debt than what is fair. The debts both you and your spouse have accumulated will be divided in your divorce. Since New Jersey is an equitable distribution state, your debts will be divided fairly by the court but not especially equally.

Acquire copies of your credit reports and those of your estranged spouse from each of the three major credit reporting bureaus. This can help to find hidden debts that you might not know about. If you can, try to pay off all debts before your divorce or refinance them so that they become the responsibility of only the spouse who will assume them. Calculate the debts, and don't take on more than what is fair under the circumstances.

14. Failing to Consider Eligibility for Derivative Social Security Benefits

If you and your spouse have been married for 10 or more years, the lower-earning spouse might be entitled to receive derivative Social Security retirement benefits based on the higher-earning spouse's earnings record. These benefits do not reduce the higher-earning spouse's retirement benefits, but they can increase the lower-earning spouse's retirement income. Take these derivative benefits into account when you're negotiating a settlement. If you are nearing 10 years of marriage, you might want to wait until you have passed the 10-year mark before you file for divorce.

15. Not Considering the Possibility of Bankruptcy

Consider what might happen if your ex files for bankruptcy after your divorce, and take the necessary steps to protect yourself. Make sure any agreements for child and spousal support or memorialized in a support order to protect them from being discharged in bankruptcy. If your spouse will assume responsibility for making payments on debts that are in both of your names, you need to consider asking for your spouse to refinance and place them in their name alone. If your spouse files for bankruptcy, creditors for debts that are still in both of your names can come after you for repayment even though they can't collect from your spouse following a bankruptcy discharge.

You also don't want your spouse's name to remain on the family home if you get it in a divorce and think that they can file for bankruptcy. If they do, there is a risk that it might be included in the bankruptcy estate and sold by the trustee since your spouse is listed as a joint owner and no longer resides in the home. If you both owe a significant amount of debt, it also might make sense for you and your spouse to jointly file for bankruptcy before filing for divorce to make property division easier.

Contact a Divorce Lawyer in New Jersey

It's best to work with an experienced NJ lawyer for financial settlement in divorce advice. An attorney can help you consider things you might otherwise overlook that could hurt you financially. To learn more, call Ziegler Law Group, LLC at (973) 533-1100 to schedule a consultation.

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