Getting Divorced or Separated? 7 Financial Mistakes Not to Make
Breaking up is always hard to do. But just because your life has been upended by a divorce or separation, it doesn't mean your finances have to suffer, too.
That's exactly what can happen, however, if you make any number of wrong moves when you're unwinding a relationship.
Here are seven financial mistakes you must avoid once you decide to end a marriage:
1. Thinking that a mediator will protect your financial interests.
Many of us think that all divorces inevitably devolve into epic, drawn-out battles over money and property, complete with bitter screaming matches, chronic stress, and "I'll get you!" style threats, kind of like The War of the Roses, the 1989 film that starred Michael Douglas and Kathleen Turner.
But that's the Hollywood version of a worst-case divorce scenario.
In real life, although lots of couples do experience very bitter divorces, it's also true that when many people break up, one party in the relationship will try everything possible to avoid unnecessary drama. This individual attempts to "make nice" to avoid a prolonged divorce and generally aims to ratchet down any lingering tensions.
For these people, retaining a divorce mediator or arbitrator is one way to accomplish a less combative divorce. A mediator is an impartial divorce specialist who works to help couples reach an "equitable" divorce settlement.
But be warned: Hiring a mediator just for the sake of "impartiality" or in an attempt to "keep the peace" is usually a bad financial move – a really bad one – particularly if you assume that a mediator will look out for your best interests.
"The primary goal of the mediator is to get a settlement. And any settlement means the mediator has done his or her job," says Susan Carlisle, a Los Angeles area CPA who specializes in family law. "Although the best mediators do their [best] to get the settlement as equitable as possible, it's your job to negotiate well for what you need and want. The mediator can't do that for you."
That's why the best mediators always recommend that each party in a divorce also have their own consulting attorney.
2. Hiring the "best" lawyer that money can buy
Just because you should hire an attorney to handle your divorce doesn't mean it should cost you and arm and a leg. "People generally think that the more expensive a lawyer is, the better they must be. This is not always the case," says Jonathan Blumenthal, a certified financial planner and senior vice president of Peak Capital Investment Services.
Others want to bring out the all-star legal power in order to get back at a spouse, prolong the process or simply "win" at all costs. "That strategy works really well for the big gun [attorney] but not well for the person getting divorced," says Carlisle. "Unfortunately, lawyers make a living off people's insecurity, pain and desire for revenge. But it almost never works."
Carlisle notes that in California, where she resides, the rates for some high-end attorneys can hit $900 an hour. That may be affordable for divorcing celebrities and CEOs but not for the average person. When hiring such high-priced attorneys, Carlisle says, "the problem is, middle-class people wind up spending $50,000 on a divorce that really should have cost them $10,000."
So what's the best alternative to getting a mediator or hiring a high-priced attorney? The solution may lie in "collaborative law," a process that lies somewhere between mediation and litigation. It's where two attorneys and the couple are committed to not going to court, but you each have a lawyer that looks out for your best interests.
"I think you definitely need representation when going through a divorce," Blumenthal says. But his advice is to take the time needed to interview several attorneys to find the right fit for you – someone qualified and affordable given your budget.
3. Keeping joint credit cards and loans
Once you call it quits in a relationship, you need to separate your finances ASAP – and try to save money during your divorce.
One reason to close joint credit cards and loans is that each of you will be 100% financially liable for debts incurred – even if the other person racked up the bills.
Additionally, says Blumenthal, "even if your divorce starts out cordial, things can change quickly when people go into survival mode." You don't want a cash-strapped or bitter ex-spouse to start running up credit card debt, suddenly stop paying bills, or begin incurring financial obligations for which you could be held responsible.
4. Insisting on hanging on to the family home
Hanging on to the family home can be a mistake both financially and mentally, experts say. "Financially, you better make sure you have the income to support the family bills and the household," Blumenthal cautions. "Mentally, going through a divorce is one of the most difficult things someone can go through, and staying in the family home makes it very difficult to move on."
Still, many divorcing people, especially women, are adamant about keeping the family home. It's often a misguided effort to provide stability for the kids.
"But kids are flexible," says Carlisle, who has consulted in more than 400 divorce cases. "It's important to try to keep the kids in the neighborhood where their friends are and where their school is," she advises. "But that doesn't mean keeping up an expensive home you can't afford."
5. Trying to maintain the exact same lifestyle
Before your divorce, you may have taken regular family vacations, eaten out whenever you wanted, and had your three kids enrolled in tennis classes and soccer lessons, as well as the after-school band club.
In your post divorce, life, however, you'd be wise to accept a simple truth and break it gently to your children: You and the kids can't do everything you previously did. "There are now two households to support," Carlisle says, which will greatly impact the family's finances. "Trying to maintain the status quo will only stress everyone, especially the parents."
6. Having a weak property settlement agreement
A divorce agreement – sometimes called a property settlement agreement or a marital settlement agreement – is an all-important document that acts as a kind of blueprint to what's going to happen in your post-divorce world financially and otherwise.
Who gets the house? Who keeps the good china? How will investments be split? And who pays alimony or child support to whom and for how long? All these things, and more, will be spelled out in your property settlement agreement.
Problems erupt, however, when your agreement fails to account for any host of potential issues that not only may arise but are almost guaranteed to come up. For instance, if there's a "change of circumstances" – say, the kids' needs change dramatically, or one party makes a lot more or a lot less money – in most states, either side can go back into court and ask to either receive more financial support or pay less financial support.
If your marital settlement agreement doesn't plan ahead for such contingencies, expect to endure a lot of back-and-forth and potential legal wrangling with your ex down the road. Indeed, the ink is barely dried on many divorce agreements, says Carlisle, "before someone is back in court, demanding a change to the agreement."
She cites an interesting case now before a New York court in which a former couple – who divorced in 2006 – equally split their sizable assets and property.
The man laid claim to millions of dollars in investments. But it turns out the funds he sought to get – and did indeed obtain – were monies invested with the notorious financial swindler Bernie Madoff. The wife, for her part, got other investments and a swanky Manhattan apartment.
Thanks to Madoff's multibillion-dollar Ponzi scheme, the husband's investments went up in smoke. So now the husband is back in court seeking a do-over of the divorce agreement. It remains to be seen how a judge will rule in the case.
7. Failing to change your will and insurance policies
Let's face it: You're breaking up for a reason. One or both of you really doesn't want to be so intimately tied to the other person. So after a divorce, why do so many couples keep the financial purse strings attached in ways that could back to haunt them? A case in point: keeping an ex spouse as an insurance beneficiary or heir in your will.
Sometimes, people simply forget to change these documents. Other times, they think "I'll get around to doing it later" or "What could it hurt for now?"
Well, it can cause plenty of problems if one spouse remarries – and Carlisle says divorcing men typically remarry within two years – and then that person passes away. The first wife, or previous spouse, gets all the money, and the new spouse might be left in the cold. Not exactly what most people would want to happen after their death.
"When you go through a divorce, you need to make sure you go back and change all your beneficiary information on all accounts and policies," advises Blumenthal. "Regardless of what you have in your will, if your ex is still the beneficiary of your IRA, for example, that will supersede your updated will."
By avoiding these seven financial mistakes after a divorce, you'll take away some of the sting of what can be an emotionally and economically taxing experience.