The Top 7 Most Common Financial Mistakes Made in Divorce Settlement

financial mistakes during divorce

You have probably heard that it makes more financial sense to reach a divorce settlement with your spouse than to go to trial. That is usually true. In addition to giving you more control over the outcome, reaching settlement shortens the divorce process, sometimes significantly. That means that your divorce attorney will not have to do the extensive trial preparation that takes many, many hours and can lead to many thousands of dollars in attorney fees.

But while reaching agreement is generally good, making the following divorce settlement mistakes can wipe out any financial benefit of resolving your case before trial. Let’s discuss some of the most common financial mistakes in divorce settlement negotiations, and how you can avoid them.

Divorce Settlement Mistake #1: Failing to Make an Accurate Budget

We know, we know. Budgeting is tedious and boring. Unfortunately, it is also essential to reaching a fair settlement. Unless you have an accurate sense not only of your current income and expenses, but what your income and expenses are likely to be after divorce, you cannot know whether a settlement will work for you.

People often make assumptions about their living expenses after divorce that turn out to be shockingly wrong; unfortunately, by then it is almost always too late to change the settlement to reflect and meet their actual needs. Coming to settlement negotiations armed with a realistic, detailed budget helps you know what you need, and positions you to get it.

Divorce Settlement Mistake #2: Failing to Get Appraisals

If your spouse has primarily dealt with a marital asset, such as a business interest, you may be tempted to take their word for what it’s worth. After all, appraisals are expensive, and if you can just agree on the value of an asset, you can bypass all those fees, right?

We recognize that getting the opinion of an experienced business valuation expert or appraiser costs money. However, relying on your spouse’s estimate could cost you more. If your spouse tells you their business is worth $500,000, and it’s really worth $2,000,000, relying on their valuation could cost you hundreds of thousands in your divorce. It happens more than you’d think. Suddenly, a business valuation expert’s fee seems pretty reasonable.

Divorce Settlement Mistake #3: Valuing Assets with Your Heart, Not Your Head

A bank account is worth exactly the amount of dollars it contains. But what about the painting you bought together on your honeymoon? Or the house where you raised your kids? While those items have a financial value, you may ascribe to them more value than they are worth because of your emotional attachment to them. Plenty of people insist they must have the marital home, or some other sentimental item, “at any cost.” Then, once they have the item, they realize what they gave up to get it, and sometimes, that it is too costly to keep.

Divorce Settlement Mistake #4: Ignoring the Tax Implications of a Settlement

Not all assets are created equal; some carry a tax benefit, such as the potential to claim a deduction, while other assets may create a tax burden. There are numerous ways in which your divorce can affect your taxes, including such details as which parent gets to claim the children as dependents. Be sure to consult with your attorney and accountant about the potential tax ramifications before you sign on the dotted line.

Remember, too, that tax law often changes; don’t assume that what once was true still is. For instance, alimony payments are no longer deductible from income for the person making them, and they are no longer taxable as income to the recipient.

Divorce Settlement Mistake #5: Forgetting About Inflation

If you promise in your divorce settlement to make a future payment, it’s important to think about what it will cost you when the payment comes, not just what it would cost today. A common example is agreeing to pay for children’s future college tuition. Sure, your income is likely to grow by that distant date — but tuition rates are likely to grow even faster.

Divorce Settlement Mistake #6: Making Concessions Just to “Have it Over With”

As a general rule, the earlier you settle your divorce, the less it will cost you. But there is an important caveat: if you rush to settlement for the wrong reasons, it could cost you a lot. Most people are easily fatigued by the divorce process, hate fighting, and want nothing more than to have the whole process behind them. “Give (my spouse) whatever they want, just get this over with!” is a common refrain. A colleague likens this attitude to a wounded wolf chewing its own leg off to escape a trap. Giving your spouse whatever they want in order to end the divorce may get you out of your “trap,” but it could also leave you permanently injured — at least financially.

Divorce Settlement Mistake #7: Ignoring the Cost of the Fight

When negotiating a settlement, it’s important to do a constant cost-benefit analysis. Some things are worth fighting for; some things are not. An attorney we know once represented a man who was very close to a final settlement with his wife. The only thing left at issue was their CD collection (this was back in the olden days, before Apple Music and Spotify).

The spouses were unwilling to divide the collection; they both wanted the whole thing, which was worth about $500. After thirty minutes of the couple fighting about it, the weary attorneys looked at each other across the conference table and agreed to confer privately. Five minutes later they walked back into the room, told their clients what the last half-hour had cost them in attorney fees, and asked if they wanted to continue. The clients instantly agreed to split up the music collection.

Divorce is a stressful event, and it is often easy to be swayed by emotions. An experienced divorce attorney can help keep you on the right track when it comes to avoiding financial mistakes in divorce. For help reaching a settlement that will meet your needs and help you build the life you want after divorce, contact BartonWood to schedule a consultation.