Avoiding Financial Pitfalls in Divorce

Divorce is a difficult and confusing process. Whether or not you have children under eighteen, regardless of your level of income or the value of your marital estate, divorce is stressful and can lead to financial missteps for those who do not seek sufficient professional feedback before taking action.

There are a number of financial pitfalls that we commonly see in divorce cases, some of which have befallen clients before they have even sought preliminary legal advice regarding divorce. When a family is being pulled apart and people struggle with emotional and financial quandaries, it's easy to make mistakes that could have a lasting impact on you and your family. For this reason, divorce attorneys sometimes advise clients and prospective clients to seek the feedback of a financial planner in conjunction with the commencement of the divorce process.

Regardless of whether you choose to seek the advice of an independent financial expert at any time during the divorce process, it is always a good idea to be aware of common pitfalls so that they can be avoided in your case. Prior to execution of any settlement agreement (whether partial or comprehensive in nature) consider taking the following precautions, particularly if you have not yet consulted with legal counsel:

Don't Transfer Title or Ownership of Assets. Many well-intentioned people have sat down at their own negotiating tables to resolve the issues of divorce, including division of assets, prior to seeking legal counsel. While making efforts to reach a resolution outside of litigation is often appropriate, troubles can arise when parties sign documents or begin effectuating a proposed property division before seeking the advice of counsel. Even if you reach a proposed resolution with your spouse that you believe you can be happy with, it is essential that you seek legal advice on any settlement proposal before signing anything and before taking action on the terms of the proposal. Should the settlement fall apart before it is formally executed, you could be left in a position where your transfer of an asset, say a car or a house, to your spouse cannot be reversed.

Be Careful About Consolidating Debt. In these tough financial times, many people are carrying high debt balances during marriage, as well as after separation and divorce. In divorce cases the courts are charged with the responsibility of dividing debt between the parties to the extent that the debt is classified as marital. Before a final decision is made regarding distribution of all assets and debts, parties should be very careful about consolidating debt, or signing up for any particular consolidation or payoff plan because taking such action can impact how the debt is classified (marital versus separate) by the court.

Draw Up a Detailed Monthly Budget. One of the most critical steps that any party can take, no matter how plentiful his or her resources, is to draw up a specific and detailed budget that lists all current income and expenses. Divorce is often a time of reevaluating expenses because the financial resources that once supported one set of household expenses is now being stretched to accommodate two households. This process is difficult and typically requires tightening of financial belts on the parts of both spouses. Before taking action to secure a new residence, a new car, an increased child care expense, or any other additional or increased recurring expense, it is critical to look at what you can reasonably afford in the short term as compared to what you have been able to afford prior to separation. It is certainly possible that the budget tightening will only be a temporary thing, but it is never advisable to put yourself in a situation where you are taking on more than you can reasonably afford, especially in the context of divorce. Imagine the leverage in litigation that one spouse could muster if the other was committed to expenses substantially beyond his or her financial means.

Don't Use Assets to Pay Off Debt. It is not always a good idea to eliminate debt by depleting marital assets before a comprehensive settlement agreement has been drafted and executed. For one thing, it is typically beneficial to have some financial liquidity during times of change, particularly divorce. Second, given that property and debts must be classified as separate or marital, and that only marital debts and assets may be divided, it could be disastrous if a party were to use marital assets to pay off a debt that, for example, may have been deemed the separate debt of the other party. If that separate debt was paid from a marital bank account by agreement of both spouses, chances are that the court is not going to have the ability to force repayment of marital monies.

Regardless of how amicable your separation and divorce may be, it's always a good idea to seek the advice of legal counsel as soon as possible. However, proceeding with caution and avoiding hasty decisions and quick financial fixes can help you to protect yourself during the process.

Please note that the above article is not intended as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship. Should you need legal advice regarding your particular case, please contact our office to schedule a consultation.

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