Unexpected Financial Pitfalls and Ways to Avoid Them in Divorce
According to a recent survey of divorced women, nearly half reported being surprised by post-divorce financial issues. This is especially true when the women were not involved in management of finances during their marriage. Family law attorney Kathleen M. Newman of the DeWitt LLP law firm is committed to using her decades of experience to proactively help clients anticipate and avoid financial pitfalls.
What are some common financial pitfalls and ways to guard against them?
- Debt. As part of any divorce, an attorney should obtain information on all debt, including mortgages, credit card debt, student loans and retirement account loans. This debt, current balances and exactly who is obligated to the creditor should be reflected on the marital balance sheet. When these debts are allocated in the divorce decree, the wife should clearly understand her obligations on the debt allocated to her. The divorce decree should include hold harmless provisions, a requirement to close credit cards if appropriate and a provision that any debt not on the balance sheet is the sole obligation of the party who incurred the debt.
- Spousal Maintenance. Under Minnesota law, there isn’t a formula for calculating spousal maintenance. Spousal maintenance can either be “temporary” to give a wife time to get back in the job market and rebuild a career, or “permanent” where there is a long-term marriage and there is doubt about whether the wife can ever be self-supporting. An attorney should do a detailed analysis of the marital standard of living budget, as well as identify all sources of wife’s income, including child support, employment income, investment income, or retirement income. The difference between a wife’s income and budget is the starting point for determining how much spousal maintenance should be and how long it should continue. As part of the divorce, the wife must understand why retirement assets awarded in the divorce should not be liquidated prior to retirement, and what her budget and income needs are after retirement.
- Underestimating the cost of maintaining the marital home. We often say a house is a “consuming” asset because it consumes income to maintain value. One needs to pay substantial expenses maintaining the home in order for it to hold its value. The wife must consider the costs of maintaining the marital home, including the mortgage, taxes, insurance and maintenance costs and decide if it is economically reasonable to keep the home and maintain it; the wife does not want to be “house poor”. Maintenance costs include exterior painting, furnace or cooling replacement, new roof, window washing, and interior maintenance. Wives are often surprised by how substantial these expenses are.
- Underestimating the cost of health insurance. If the husband maintains health insurance through his employment, the wife needs to find out the cost of COBRA coverage and include it in budget calculations. The wife needs to understand that the group COBRA rate continues for only 3 years, and then increases to market rates. Even group COBRA coverage is expensive, and those contemplating divorce should explore private or state sponsored plans before deciding what cost to include in the divorce budget. The cost of individual health insurance increases from 4% - 5% annually and even woman with employer funded health insurance often face increased contribution obligations as employers pass increasing costs to them.
- Unanticipated costs of returning to the workforce. In many cases, the divorce will require a spouse to return to work or increase part-time hours to full-time. This can cause substantial and often unanticipated costs including assembling an appropriate work wardrobe, additional transportation costs including payment of parking, lunch and break time food expenses, and ongoing training expenses. Additional childcare costs also need to be factored in, especially during the summer.
Take-away: Understanding post-divorce income and expenses are an important part of negotiating a divorce, and necessary if it it goes to trial. Accurate budgets supported by financial documentation and a clear understanding of net income is essential. An attorney may recommend using a financial expert to help with these issues. Minimizing unexpected expenses post-divorce is critical to a divorcee's future well-being and happiness.
If you are considering a divorce, we will use our skills and experience to help you avoid these pitfalls. Please contact Attorney Kathleen M. Newman of the DeWitt LLP law firm to discuss your matter.
“The Biggest Money-Related Surprises when you Get Divorced, Considerable (September 24, 2020).
“How to Recover Financially from a Divorce,” The Washington Post (October 22, 2019).
“The 6 Nasty Financial Surprises For Divorcing Women,” Forbes (July 15, 2018)