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What are the top financial mistakes you should seek to avoid in your divorce?

When were you and your spouse just getting married did you discuss how you were going to handle finances and money? Many couples develop an understanding at this stage of marriage about how they are going to handle money. Some of you may have decided to maintain separate financial lives for a variety of reasons. Maybe you had been married before and had experienced problems after you had shared finances in that relationship. Or maybe you and your spouse did decide to combine your finances to better handle the challenges of handling money and making money decisions. 

To some extent, it is likely that you at least combined your money to some extent in some situations and discussed at least in theory how to spend your money. Now that you are considering a divorce you need to start once again thinking about divorce as a single person. This wasn't your plan when you first got married but it is the reality that is facing you right now. Taking a step back to think about where you are currently from a financial standpoint and where you need to go both during and after the divorce is a logical place to begin.

Making it through the divorce

It is reasonable to be concerned with simply making it out of the divorce in one piece when it comes to finances. We have all heard horror stories about how divorce ends up being one big expense after another. A seemingly never-ending process of being hit over the head with fees, expenses, bills, and the like. Needing to hire an attorney can end up being the most expensive part of the entire divorce process when it is all said and done. 

Finances and financial decisions are not the most exciting topics in the world, but they are nonetheless extremely important. Do not underestimate just how critical it can be to have a plan for your money during your divorce. Throwing caution to the wind, not planning, and then losing control of your finances may be common but it should not be something you resign yourself to. You can do better. You can decide to discipline yourself enough to avoid financial mistakes that can topple your divorce and set you way behind when it comes to your life post-divorce. 

You must be able to approach this subject as someone who is invested in your case and your life but is not going to be overly emotional about any subject. I know that this sounds difficult considering the enormity of the situation before you. I know that you may have little kids and a lot of money at stake in the divorce. If I were in your shoes, I’d probably be feeling pretty emotional about the whole thing, too. But I am sharing with you information that I have seen many people utilize to their advantage. Make a pact with yourself to treat your divorce like a business transaction.  That doesn’t mean you should love your kids any less, but it also means that you should not allow a  setback in the custody area of your case to impact how you negotiate for community property. 

What benefits are available to your spouse?

If I asked you what your spouse did for a living, you could probably give me a general answer. You may even be able to tell me their exact job title and the place where he or she works. Fewer of you could probably tell me in detail about their benefits through work- including about various retirement benefits that are available. This is something that you need to be able to learn about as you proceed down the path toward divorce. 

The reason that you need to become an expert on your spouse’s benefits through their employer is that, at least regarding retirement benefits, you are likely entitled to a portion of them. Do I have your attention now? Just because the retirement plan has your spouse’s name on it doesn’t mean that the money in the plan is all theirs. Rather, assuming that the plan was contributed to during your marriage then there is a community share of that account just waiting for you to learn more about it. 

It doesn’t matter if your spouse has a defined contribution plan like a 401(K) or Individual Retirement Account (IRA) or a defined benefit plan like a pension. Both types of plans allow for you as a spouse to receive a portion because of your divorce. You will need to determine how much of the plan was contributed to during your marriage to determine what is eligible for division in the divorce. By the way, you should work to figure out the same thing for your retirement accounts.

There are many ways to divide retirement benefits if you ultimately decide to divide them. You can start to think more about that now during the planning stage of your divorce rather than only considering this subject before final orders mediation. By that time, you may have lost the opportunity to request documents or information through discovery and are left with limited information and knowledge. Not exactly the most advantageous position to be in.

Another element of this discussion that I think bears mentioning is that depending upon how much you have in retirement and how much your spouse has in retirement that it may make sense for you to not divide up your various accounts at all. There is a process involved in dividing up retirement benefits that is more complicated than simply dividing up the money in a checking or savings account. Certain steps need to be followed exactly or you will find that the money you expected to be yours at retirement has not been processed correctly. It is important to keep these steps in mind as you are going through your divorce. 

as a result, if both you and your spouse have retirement savings to your names in the process of dividing them it would be a lot of trouble for not much gain for either of you then you may decide to look at this situation as one where you just keep the accounts as they are and do not try to divide them in any way. This could save you a lot of time and expense during the case for a minimal net gain for both of you after the divorce comes to an end.

To get to the stage where you are comfortable with leaving your retirement accounts alone, you need to first know what is in your accounts and what is in your spouse's accounts. From my experience as an attorney helping people in divorce cases, it is not uncommon to find that neither spouse has been paying particularly close attention to whether retirement accounts were heading into a divorce. You may generally know where your money is invested in the types of investments you have but to say that you know the current balances or investment allocations exactly may be a bit of an exaggeration.

On top of that, you may know very little about your spouse’s retirement accounts and where they have their money invested. The documents and other plan information could be kept under the spouses' tablet or laptop which you no longer have access to since the divorce began. With limited opportunity to access this information during a divorce you must have up-to-date information to be able to negotiate. Without this sort of updating information, there's no way you could intelligently negotiate or make decisions about dividing up retirement.

Additionally, you need to consider factors like your work history, job skills, age, and health level. These are considerations that you should consider as you negotiate retirement benefits. Bear in mind that unless you are of retirement age you will have some opportunity to continue to grow your savings. In that sense, retirement savings may not be the most important consideration for you in the divorce. On the other hand, if you have been a stay-at-home parent or spouse and if not worked outside the home, then being able to take advantage of the Community property laws of Texas as far as how to divide retirement benefits can be extremely important to you.

Not preparing your Qualified Domestic Relations Order properly 

Another aspect of retirement savings where people run into mistakes on a somewhat frequent basis regarding their divorces is regarding the qualified domestic relations order. A qualified domestic relations order is a necessary document that will instruct the plan administrator for the retirement plan on how to divide up property. This order should be drafted before the end of your divorce. order so that you can better understand how to phrase certain languages that will better facilitate the division of the retirement account.

The most common mistake that people make regarding the qualified domestic relations order is that they simply do not consider that this document needs to be drafted by the particular retirement plan that is being divided. You and your attorney should check with the plan administrator for your retirement or your spouse’s retirement before the end of the divorce. In that way, you can verify what language needs to be contained in the Document.

Being able to submit this document to a judge at the end of your divorce makes the most sense from a timing perspective. When the judges sign off on your final decree of divorce, wage withholding order, and any other documents that are related to your case you can also submit your qualified domestic relations order for the judge's review and approval. Once the judge signs the document you can send a certified copy to the plan administrator for whatever retirement plan needs to be divided. From there, the plan administrator can follow the plan language and rules when it comes to dividing up a retirement account.

Having two go about the process of having your qualified domestic relations order completed after your divorce comes to an end is a huge pain in the neck. You will have to track down the planned administrator, have your attorney draft the language, and then review it before the judge's signing period all of this could have and should have been done with time to spare during the divorce. Most of your divorce would have already been finished. Your final decree of divorce would have already been signed and filed. However, there is this there is the important matter of the qualified domestic relations order still outstanding which should have been considered months earlier.

You can begin to work on this step of your case sooner rather than later. Contacting the plan administrator for the retirement account early enough to get the plan language needed for your qualified domestic relations order is not all that time-consuming. Drafting the document even before you have negotiated a retirement plan is not a bad idea. You can simply insert this specific language on the division of the account once you know how the plan will be divided.

Making the mistake of not understanding your finances

one thing that I have learned in my time as a practicing family law attorney is that every person and every family handles finances a little bit differently. What works well for my family may not work well for yours and vice versa. Everyone has an opinion on how household finances should be treated. Even if my wife and I have experienced success regarding personal finance that doesn't mean that I need to necessarily share my opinions on the subject with you during your divorce. It simply is not the time or place for that kind of discussion. As such, it can be difficult to bring up the subject of personal finances especially if you and your spouse are both somewhat clueless about the subject.

On a general level, you should have an understanding of what your household finances are heading into the divorce. From a short-term perspective, understanding what your household bills are as well as your income can help you prepare a budget for your divorce. The budget is a key tool to attack any divorce as it helps you understand where your money is going and ultimately will tell you how to direct the limited resources you have. Thus, you can feel better about the money that you spend and not exactly how your funds are being utilized. This is as opposed to wondering where your money is going each month.

It is also important to understand your finances from the perspective of your bills not going away during the divorce. The truth is that, although it may feel like your divorce is the only thing going on in the world, the world will continue to spin during your divorce case. As such, you need to be prepared for the reality that you will need to account for your bills even during the divorce. In most cases, you and your spouse will agree on how to divide up household bills. You should prepare to discuss this with your spouse. Knowing the bills before you had the discussion is an essential part of the conversation.

Next, you should have a good idea of your household income to determine what your budget will need to look like as an individual after your divorce comes to an end. For example, are you going to need spousal maintenance or alimony after the divorce? If so, you should consider your spouse's ability to pay special maintenance as well as whether you qualify for it. Factors like the length of your marriage and your proven needs are all going to be considered when it comes to this subject.

You should also consider your income and what you can do to increase it after the divorce comes to an end. Without a doubt, there are only a few circumstances where you will be able to live a similar lifestyle immediately after the divorce than you did during the divorce itself. This is due to your household income going down from 2 incomes to one. To prepare for this, change you should begin to consider your household budget as well as your income. Are you able to work more? Take on a second job or complete a degree that will allow you to change jobs soon. Understanding your finances will be able to help you answer this question more readily.

Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan

if you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week at our three Houston area locations, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family circumstances may be impacted by the filing of a divorce or child custody case.

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