5 Divorce Mistakes That Can Cost You

It's all too easy to make unforced errors in a divorce. Here are the worst mistakes to make and why they need to be avoided.
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Depending on where you live in the U.S., the divorce rate ranges from 10%-to-25%.

Those numbers are far better than the 50% U.S. divorce rate that’s been bandied about for a decade or so, and has since largely been debunked by social scientists.

Still, at a potentially 25% divorce rate, that translates into millions of Americans getting divorced every year, and millions of Americans risking serious financial trouble in the process.

If you’re either considering divorce or are already experiencing a marital split, do yourself a big favor and get to know the most serious financial mistakes individuals make – and do everything in your power to avoid them.

Here’s the list. Keep it handy when you’re in the throes of divorce and save yourself a bundle of cash as a result.

The Biggest Mistakes People Make in Divorce

1. Keeping the House – Even Though It’s Too Expensive

When couples split for good, the temptation is for one ex-spouse to keep the marital house, without having the full brunt of two incomes supporting that house.

Wanting to keep the marital home is understandable. You put a ton of both financial and sweat equity into your home and likely raised children in the home. But hope doesn’t usually square with reality when you want to keep your home and finance it with one income instead of two.

Sociologists call that scenario being “house poor” and there’s a good reason for that. When you’re pouring too much money into the marital home, at the expense of other financial needs like having an emergency fund or saving for college or retirement, you’re eventually going to fall short in one or more of those household financial areas, and likely exhaust yourself in the process.

2. Paying Too Much for Legal Help

A good divorce lawyer costs between $100 and $650 per hour, depending on what state you reside (or even what zip code you reside), and $15,000 on average, according to Thervo, a legal services web site.

Depending on what you’re trying to accomplish in your divorce (i.e., being financially fair with a spouse or exact revenge at any price) that figure can go up exponentially. Save that regret by agreeing with your soon to be ex-spouse to use a mediator to review your assets and personal post-divorce living preferences, and come to a binding decision.

Again, the price of legal help via a private mediator depends on where you reside. But in general, a good mediator can wrap things up for around $1,500, according to Thervo. 

3. Taxes You Didn’t See Coming 

In many divorce scenarios, the sale of a private residence can come part and parcel with the matrimonial split.

That scenario harbors a separate antagonist you didn’t see coming – the I.R.S.

That’s due to the tax implications of the sale or a private residence (divorce or not). The same can be said for the split involving any retirement plan in a divorce proceeding.

When you split the sale of a house or a retirement plan in a divorce agreement, that action triggers tax consequences. In the event of a home sale, the owners (presumably the two spouses) can count on not paying a capital gains tax if the property sale doesn’t exceed $250,000 (that’s the capital gains threshold) for an individual and $500,000 for a joint return.

Thus, if you live in a high-priced real estate area of the country, you may have to prepare to pay a capital gains tax on your property sale in a divorce. That further cuts into the financial pain of an already expensive divorce.

It’s pretty much the same deal when you sell securities in a marital split. Capital gains taxes come into play there too. Fidelity Investments summarizes the risks inherent in selling stocks in a divorce deal.

“Assuming your investment has appreciated, you will end up with less than the sale price—because you have to pay taxes on any gains over the cost basis,” the money management firm states in an advisory note. “Exactly how much will depend on your tax rate, holding period, and cost basis, which can vary for a single investment if you bought shares over time.”

“So, if you're dividing investments equally, the cost basis must be divided equally as well—your financial institution should be able to help with that, including other important factors to think about concerning investments, like the prospects for growth or income, your tolerance for investment risk, your financial needs, and your timeframe for investing,” Fidelity states.

4. Ignoring Estate Planning

During a divorce, documents tend to pile up and some paperwork may fall through the cracks. That’s often the case with estate documents, which should be a priority for both spouses in the event of a divorce.

All too often, spouses involved in a divorce – especially parents – forget to update beneficiaries on key documents like wills, trusts, insurance plans, retirement accounts, and charitable plans.

Spouses also may need to establish new estate plan trustees and new powers of attorney, as well. It’s best to have this paperwork prepared before you sign off on any divorce papers. A good estate planning attorney can help you update your estate planning documents – so you won’t forget to do so.

5. Disregarding a New Budget

Soon to be ex-spouses often don’t consider personal budgets when getting a divorce. After years of marriage and cohabitation, a spouse may not fully comprehend the reality of living on one income, and that goes double for the spouse who’ll be paying alimony and child support.

That’s why it’s so important to create a new household budget for divorcing spouses.

Start by creating a monthly spending plan that takes key personal financial expenses into account, like housing, utilities, cable and phone, long-term savings childcare, and alimony and child support, if applicable. Make sure your budget is based in reality – you’re likely going to have a lower household income living on your own.

Being prepared with a good household budget for the single life upfront will help you set a baseline for your current and future living expenses, and reduce the need for you to live hand to mouth, borrow money, or take on a side job to make ends meet.

The Takeaway on Divorce and Financial Mistakes

Industry data shows that half of the American households see a significantly reduced income following a divorce.

Compounding an already dicey financial situation with unforced errors will only make a divorce experience worse.

If you’re in a divorce or are considering one soon, factor the above financial issues into your strategic plan – and strengthen your money management skills at a time when you’ll need them most.