13 Big Financial Mistakes People Make When Divorcing

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The price of separation

Going through a divorce is hard enough, not to mention emotionally and financially draining. During this turbulent period, people often make mistakes that can have long-lasting effects on their financial situation. Understanding these mistakes and their causes is crucial to helping a person protect their financial future and be better prepared for the next chapter in their life.

Here are 13 common financial mistakes people can make during divorce proceedings and why they happen — plus tips on how to avoid them.

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1. Lack of understanding of the financial situation

During a marriage, it is not uncommon for one partner to handle all the finances while the other remains unaware of their financial picture. This can lead to clashes or ill-informed decisions during the divorce process. To avoid this, both parties must have a complete understanding of all assets, debts, income and expenses.

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2. Overlooking tax implications

Decisions made during a divorce can have significant tax consequences, including how to divide alimony payments, retirement accounts, and estate taxes. As such, it is always advisable to consult with a trusted tax professional to understand the potential tax implications and avoid being hit with hefty tax bills.

Signing the divorce decree

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3. Ignoring long-term financial security for short-term gains

Choosing a lump sum settlement without taking into account your long-term financial needs can put your future financial security at risk. For example, choosing to keep the family home without evaluating the ability to afford ongoing maintenance, property taxes, and mortgage payments may lead to financial stress in the future.

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4. Forget to think about health insurance

Losing health coverage is another commonly overlooked consequence of divorce — especially if you’re unemployed or used to get insurance through your ex-spouse’s job. It is important to explore your health insurance options, Including Cobra Or private insurance, to avoid any gaps in insurance.

Related: 5 cheapest ways to see a doctor without insurance

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5. Retirement accounts are not divided properly

Dividing retirement accounts can be a complex process and requires a basic understanding All type of account. Because 401(k) and Roth IRA accounts can have different rules regarding withdrawals, it’s important to use the correct procedures to avoid unnecessary taxes and penalties. a Qualified Domestic Relations Order (QDRO) It may be necessary to split some retirement plans without incurring these costs.

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6. Reducing the cost of divorce

With the average cost of divorce Ranging from From $15,000 to $20,000 in the United States, expenses such as legal fees and court fees can add up quickly. Not planning for these costs can lead to significant financial stress. To avoid this scenario, consider creating a budget or setting aside money to help with expenses. Another alternative is used Brokerage services As an alternative to traditional issues.

Related: The most expensive celebrity divorces of all time

I'm not happy at all

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7. Allow emotions to drive financial decisions

During divorce proceedings, decisions driven by anger, guilt, or grief can lead to poor outcomes that can impact your financial health for years to come. These feelings can cloud judgment and lead individuals to make rash decisions simply to gain immediate relief or to hurt the other party, rather than focusing on their long-term financial well-being.

These errors can have effects on you Balance levelOr insufficient retirement funds, or ongoing legal battles. To avoid making rash decisions, consult a professional advisor or attorney for guidance, support, and clarification on financial terminology.

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8. Failure to update real estate plans and beneficiaries

Failure to update wills, trusts, and beneficiary information on retirement accounts and insurance policies can lead to unintended consequences, such as continued distribution of assets to former spouses or other unintended beneficiaries. As such, it is essential to review and update these documents as soon as possible after the divorce.

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9. Forget shared debts

If your ex-spouse, for example, has a gambling problem, you may still be liable for his debts, even if you didn’t incur them (that’s crazy, we know). To avoid getting in trouble because of your ex’s financial problems, make sure All shared debts It is addressed in a divorce settlement to prevent future financial disputes and other unwelcome surprises.

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10. Failure to provide alimony and child support

Without proper documentation, securing alimony or child support payments may be difficult if the other party becomes unwilling or unable to pay. To avoid this problem, be sure to ask your attorney for a legally binding agreement or court order specifying the amount, term, and payment terms. This is possible Help ensure payments It is fulfilled and implemented in the long term.

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11. Neglecting to evaluate the liquidity of assets

Obtaining real estate assets or land in a divorce can be difficult if you are in a pinch for money. Because these types of assets cannot be quickly converted into cash without selling them first, this can take time – and you may not always get the price you expect. It would be wise to do research on Property value Balancing long-term assets with cash or items that can be sold quickly for immediate cash.

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12. Divorce yourself without understanding its effects

While A DIY divorce While this may seem cost-effective, it can lead to costly mistakes – especially in complex financial situations where children or assets are involved. Seeking advice from professionals, including lawyers and financial advisors, can prevent these mistakes. Some attorneys may also offer a lower cost for a consultation, or offer services on a Graduated scale Based on per capita income.

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13. Rushing into a new relationship too early

Returning to the dating scene immediately after divorce can lead to emotional and financial complications. While people often look for companionship to fill the void left by their breakup, they may not be emotionally ready to make sound decisions. This haste can cloud judgment and lead to unsustainable financial choices, such as lavish spending on appointments and vacations.

To avoid this mistake, consider taking some time to recover and fully understand your new financial situation after divorce.

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