Saving Money on Divorce
A young, recently-divorced couple walked through the door of the Certified Divorce Financial Analyst (CDFA). Neither of them had ever met with a professional before the judge’s final signature to learn the consequences of what they had agreed to in their divorce. They decided not to spend money on an expert’s guidance since they “agreed on everything.” Instead, she had spoken extensively to her divorced sister and a divorced friend, and he had a buddy at work that he relied on.
Together, they had accounts of about $250,000. She had an inheritance of some stocks and mutual funds and he had his 401k from work. They also had about $150,000 in an account of mutual funds that was not part of their retirement planning. They decided to evenly split this account, keeping their respective accounts in their own names. He had a small pension that he decided not to mention, since “it was pretty small.” This was the sum of their financial planning together.
They agreed to split their checking accounts. He was taking the credit card debt of $15,000 and a loan for a boat they had purchased a year ago. She would keep the house. He was to pay her spousal support for three years and child support, which had been calculated using the state’s worksheet.
At a glance of this scenario, I can see multiple red flags which are going to cause problems, headaches, and disagreements. Let me sum up a few.
- They consulted friends and family on legal/financial issues. Friends and family are moral support, not professional counsel. Even if they have gone through a divorce of their own, every situation is different.
- The inherited account could have been sole and separate property IF she had not co-mingled any of the funds. This means she may not have had to consider this in the divorce.
- His 401k never had any taxes paid on them. Comparing an account that was going to have all taxes paid on it in the future to an account with taxes paid annually is not an equitable division.
- She will not be not able to keep up with mortgage payments even with her new full-time job and the spousal support. She will have to return to school to refresh her degrees, which is neither financially nor logistically feasible. She had thought there might some equity in the house, that she could sell it, but hadn’t realized that housing prices had dropped substantially since they purchased. And they had taken out a home equity line of credit which she had forgotten about, since she was not the one to pay monthly expenses.
- By the time he pays spousal support, child support, boat payments, and a new mortgage on another house he bought, he will be getting further and further behind on credit card payments.
- Not disclosing his pension was something he thought was insignificant, but this could cause multiple problems and possibly drag them back into court. The legal cost of settling the matter would create much larger financial and emotional problems for both sides.
These are just the initial red flags. The fee this couple paid for not hiring an expert was much higher than someone who paid for expert advice, the long-term effects of which will last through out their lifetimes.
The cost of legal or financial advice may be the best investment they could make for their respective futures. There are many experienced attorneys and CDFAs who have their clients’ best interests at heart, which is the fiduciary duty of the CDFA.
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