Divorce can be financially ruinous, especially for women who are unprepared. When you think about divorce, especially if it’s really new to you, you probably feel anxious and overwhelmed. It’s a big deal! There are a lot of different things involved, and it’s hard to think about retirement accounts and refinancing and credit card debt when the world around you is crumbling. Still, it’s something you’re going to have to do. You’ll want to make sure you spend some time determining what your assets and liabilities are, considering the tax implications of keeping or giving up those assets or liabilities, and coming up with financial plans that help you get the best possible new start for your post divorce life.
I’ve seen women make a lot of big mistakes in their divorces, and the most devastating mistakes are the ones that are financial because they have such a long lasting impact on a woman’s life. I try to do everything I can to educate women about divorce and give them the tools to make the best decisions possible, so I’ve gathered here a list of the 12 major mistakes I see divorcing women making.
You’re probably thinking, “Wow, 12 mistakes! That’s a lot!” And it’s true, it really is a lot! It’s so many, in fact, that I’ve had to divide this article into two pieces. I’ll talk about the first six things today, and we’ll finish up with the last six on Wednesday. I want to spend a lot of time talking about these things to make sure that you don’t make some of the same mistakes that I’ve seen other women making. Divorce is hard enough without making serious financial mistakes on top of it.
You may feel like your marriage was a failure, but there’s no reason to feel that way about your divorce. You’ve got one chance to do it, so you might as well do the research and do it right.
1. Not enough money on hand.
When a man and a woman separate, one thing almost always happens: the higher earning spouse starts having his paychecks direct deposited somewhere else. Technically, of course, whatever you make after separation is separate property, so I understand why this happens. That doesn’t mean that the higher earning spouse doesn’t owe any support to the lower earning spouse, but usually there hasn’t been any kind of support (child or spousal) ordered at this point, so the higher earning spouse keeps it all to himself for a period of time, leaving the lower earning spouse without any money on hand to pay bills, make the mortgage on time, or buy groceries.
You’re going to need money on hand when you separate, even if you’re planning on living separate in the same home. You can be sure that money between you and your soon to be ex won’t be quite as free flowing as it used to be, and if you earn less than your husband, it’s going to put you in a bit of a financial jam.
It’s a good idea to get a little extra cash back at the grocery store, or start picking up some of those gift cards to places where you regularly shop that you find at the checkout line. (Neither one of these things will show up as separate items on your online statement, so your hubby probably won’t figure it out, and it can help you out a ton.) Apply for a loan or get credit cards if you don’t have any in your name. Open a separate bank account, especially if your hubby already has, and have your paychecks direct deposited there. Make sure you have access to money if you’re in a tight spot. Chances are, you’ll come across a situation (like when you’re hiring an attorney, maybe) where you need access to a fairly substantial amount of money quickly.
2. Little to no pre separation preparation.
Think about what you’ll need in the coming year ahead of time, and plan accordingly. Don’t be that woman who drives off in the head of the moment with an overnight bag and a car that needs a state inspection and four new tires. If you know that you and your husband are going to separate in the new future, take care of all those expensive things that you’ve been putting off. Go to the doctor (and take the kids while you’re at it), get the braces, pay the activity fees, buy the new tires, get the inspection, and repair the roof. If you do it now, you’ll be able to use marital funds. If you wait until later, you may be paying for your tires all on your own.
Think smart about the future, too. If your husband is about to receive a big bonus or a raise at work, don’t separate until after he gets it. That way, you’ll be entitled to a portion, too, rather than letting him keep it all because it was received after you separated. If you’re a military spouse, consider how long you’ve been married. Are you close to being a 20/20/20 spouse? If so, you may want to drag things out a little longer. Timing is everything with divorce just like for everything else, so you want to make sure that you consider all the possibilities before you make a careless or unintentional move that might hurt you later on. It can make a big difference, so you should be sure you prepare for your divorce carefully. Read about the process, and consult with a professional. Don’t be afraid to ask questions if you’re not sure!
3. No documentation.
Just about anything in life is all about what you can prove. If you don’t have great documentation, it may be hard for you to prove what you have, what you’ve earned, what you owe, and, essentially, what all of your assets and liabilities are. You will definitely want to have copies of tax returns, loan applications, credit card statements, mortgage interest statements, bank account statements, and pretty much everything else you can get your hands on, because these documents will make it so much easier for you to begin to figure out how to appropriately and effectively divide everything between you and your soon to be ex husband.
Not only that, but a lot of times finding copies of these documents can be instrumental in planning for the future, especially since your income is going to be cut pretty dramatically. After all, in a divorce, no one walks away with more money than they had beforehand. You’ll take the income that you had, divide it in two (probably unequally, because it’s rare that both spouses earn exactly the same), and support two households with the same money. It’s almost always a difficult period financially, so it’s a great time to analyze your spending and, if possible, find out where you can cut back a little. Tax returns, especially, are incredibly important. If you’re worried about hidden assets, the tax return may show you how to find them.
The more information you can get your hands on, the better prepared you’ll be, both now for your divorce and in the future for your brand new start. Your attorney can probably help you find this stuff in the discovery process, but that will take time and cost money. If you have it on your own, you can move much more quickly and easily through the process, and you won’t have to spend money asking your husband to provide documentation to you. Not only that, but you’ll be able to spend some time looking at what you’ve spent, where you can make cuts, and figuring out how to make your brand new start as easy as possible.
4. Not taking accurate inventory.
Virginia is an equitable distribution (as opposed to a community property) state. We classify property as one of three things: separate, marital, or hybrid.
Separate property is anything that was earned or acquired before the marriage, or received as a gift or inheritance before or after the marriage, as long as it wasn’t from your spouse. Marital property is anything that was earned, purchased, or otherwise acquired during the marriage. Hybrid property, on the other hand, is a combination of the two, so it’s part marital and part separate. An example of a hybrid asset would be something like a home or a retirement account that existed prior to marriage, but which was maintained, contributed to, or paid for during the marriage with marital money.
You have an interest in anything that is either marital or hybrid, so you should be sure that you’re taking inventory. Just because he purchased the home, for example, before your wedding doesn’t mean that you don’t have an interest. If you improved the home (whether you did the work personally or paid someone else to do it), you have something called “sweat equity,” in the house because of it’s appreciated value. Not only that, but if you made the mortgage payments together, you also have an interest in the equity that accrued as a result of your contributions as well. Don’t write this interest off!
You should also take inventory of safe deposit boxes, make sure you look into all bank account statements, view pay stubs, retirement account statements, and even insurance policies. If you have a business together, it’s not a bad idea to engage a forensic CPA to look for signs of additional (unreported) income. Hobbies or side businesses that generate income are also good places to look. Expensive hobby equipment should also be appropriately valued. Check into all of these things, and be sure you don’t unintentionally sell yourself short.
5. Not paying attention to consequences (like taxes).
Most divorce attorneys are not also tax attorneys, so we often recommend that our client go see someone else to figure out exactly what kind of tax consequences might stem from their divorce. A lot of women feel very emotionally attached to the marital home (usually because its where their children were born and grew up), so they do everything they can to keep it, without really thinking about what keeping it actually means. Taking the home in the divorce can result in a surprising amount of tax liability, not to mention the added cost of insurance and upkeep. (Without a hubby around full time, are you going to need to hire a landscaper? Or a housekeeper? Doing it on your own is very different than doing it together.)
Talk to a tax attorney if you have questions about what happens if the IRS decides to audit you later on. Should your separation agreement include a clause that indemnifies you? What about filing joint tax returns after separation? Usually, we leave it up to the client, and lots of clients like to because it keeps them in a better tax bracket. Still, it can have unintended consequences, and you don’t want to get stuck paying taxes on income that you didn’t ever know anything about.
6. What you don’t know won’t hurt you.
When it comes to divorce, what you don’t know absolutely can hurt you. Not only that, but it can be very expensive. It’s important that you take the time to find out all your options so that you can make the smartest decisions possible. You should learn all about the legal process, take time to inventory your assets, explore your current finances, make plans for the future, check out career options (if applicable), and do everything else you can think of to make sure your divorce runs as smoothly as possible. Your attorney will give you advice, but you know more about your situation than your attorney. You may want to do a little detective work on your own, and certainly be sure to ask questions about anything you’re not entirely sure about.
On Wednesday, we’ll look into the last six financial pitfalls of divorce, so stay tuned! Prepare for your divorce and prevent yourself from making these big financial mistakes. For more information, or to speak with one of our divorce attorneys, give our office a call at (757) 425-5200.