Everything these days is becoming do-it-yourself, and the divorce process is no exception. When a well-intentioned divorcing couple calls our office or comes to a consultation, I am often amazed at how well-informed they already are about the divorce process. With so much information available online, the right couple for a collaborative, uncontested out-of-court divorce can really have a leg up if they wish to finalize their own divorce without any professional guidance or advice. However, a little learning can be a dangerous thing for some couples. You can become so overfocused on the general information you read, that you can miss the forest for the trees.
While I applaud you for trying to save yourselves and your family much time, cost, headache and heartache by doing it on your own, you really need to enter into your divorce with your eyes wide open. Therefore, I share the following 5 money pitfalls for every divorcing couple's edification. These are based on what I have learned over the years from actual couples who decided to do their own divorce and ended up regretting their choice. I hope this helps you avoid a similar fate.
Do-it-Yourself Divorce Money Pitfall #1
Misunderstanding all the forms and requirements to obtain a divorce
Maybe your situation is a simple divorce - a short-term marriage (under 5 years), no property to divide, and you have no children under 18. How many times have I met with spouses like this, who just want the marriage over. They know they don't want attorneys involved. Many of them say they want to do it on their own.
I always encourage you to try, but I would remind you of two things:
- Depending on the county you are filing in (although state-mandated forms and documents are the same), each county has its own customs and self-imposed filing requirements (some very nitpicky in nature) such that if an applicant is unaware, could spend endless hours trying to fight the system to get their decree.
- You should not expect to go to the courthouse and receive any help from the county court clerk.
A court clerk is not a customer service rep. They are ethically-bound and not permitted to give any assistance that could be construed as legal advice. As such, you will either be directed to retain a lawyer to help you or be sent to the basement library to look up the required forms contained in dusty old law books. County courts generally do not post divorce forms on their website for public consumption.
Online filing services often don't know these nuances, either. That's why the safest and most guaranteed way to expedite your divorce is to work with with a local firm who is familiar with the local rules and customs of the particular county in which you are filing.
This video may help you understand the process
Do-it-Yourself Divorce Money Pitfall #2
Not taking time to learn basic legal rights and entitlements under the divorce law
If you both decide to do your own divorce, you are not necessarily bound by the dictates of the law in the settlement you reach. Yet, every couple I have worked with, or calls us, definitely wants some guidance on what their basic rights and entitlements are upon divorce, even if they end up not needing mediation.
Why? Knowing your rights and entitlements gives you both much greater confidence and peace of mind that your decisions were more knowing and informed, thus translating into a settlement that is most fair and adequate to both. And most importantly, one that feels most comfortable, suitable and realistic for your family's future needs. Plus, a settlement that generally feels good to both of you, and that was negotiated on all fours, is much less likely to be challenged down the line. Even if you decline those rights and entitlements, you'll at least know what you are waiving.
By contrast, in a do-it-yourself divorce, you are entirely responsible on your own to obtain this legal knowledge and guidance. You can do your own research, but in the end you may still need to retain lawyers to represent your interests. This is an outcome you both did not want or contemplate when you initially set out to do your own divorce.
That's why, if you consider yourself to be a smart and savvy couple, you could place your trust in a neutral third-party attorney-mediator. In a non-adversarial context to provide you with this guidance, this is one way to achieve your desired end without having of you ending up retaining your own lawyers to finalize your divorce.
Do-it-Yourself Divorce Money Pitfall #3
Not considering tax consequences, especially upon a divorce
The taxman cometh, especially upon a divorce! Divorce always brings tax issues (often very complex) and consequences that many couples will never be aware of until it is too late. For example, transfers and liquidation of marital property, investment accounts, retirement, real estate, timing of filing for the divorce decree and filing statuses, etc... can result in huge tax bites which can rapidly deplete the very assets that divorcing spouses worked so hard to preserve during the marriage. In addition, if alimony is being paid as part of the settlement, it is generally taxable to the recipient and tax deductible to the payer, a tax principle of which many do-it-yourselfers are not aware.
I remember a husband who, while still married, liquidated significant portions of a joint stock fund to pay his wIfe a large lump sum of cash in lieu of alimony.
Although he had read online that an alimony claim could be "bought out" at the time of divorce as a non-tax event, he didn't realize that the source of funds they were using were assets that could be liquidated only upon incurring capital gains taxes. They were hit with a tax bill in excess of $30,000. What was worse was that once this unexpected tax bill hit, a dispute arose over who was responsible.
The husband said it was the wife's liability because she ultimately benefitted from the alimony while she said it was liquidated jointly at the time the couple was still married so it was a joint marital tax debt. What was even worse, had they met with a financial broker in advance, they would have been advised of this consequence, and if they still wanted to liquidate the stock fund, the broker could have advised them on which specific stocks to liquidate which would have resulted in capital losses rather than capital gains to minimize their tax exposure.
Even if you have nothing to split (a simple divorce) and just want to make sure you are divorced before the end of the year for tax reasons, you will want to make sure you are filing correctly so as to avoid delays in getting your decree in the tax year that you both desire.
Do-it-Yourself Divorce Money Pitfall #4
Not properly budgeting for the new normal after the divorce
One of the most difficult aspects for couples going through a divorce transition is moving from the present and into the future financially.
This is true because you have probably grown accustomed to pooling your income in one household for so long. To somehow all of a sudden be asked to split the income across two households, in an effort to figure our how much disposible net monthly income you will each have in your own household, and then how much they your need in light of any obligations upon divorce, can be a frighteningly daunting task indeed.
I saw this happen to a spouse who wrongly estimated his monthly income to be significantly more than what he was actually going to make. He also forgot to consider that he would have to pick up health insurance upon the divorce at his cost (he was previously on his wife's work policy). He would then be thrust into a much higher tax bracket because he would no longer be owning a home, which his wife acquired in the settlement. Notwithstanding these oversights, he agreed to pay his wife almost twice as much alimony than he could afford. When he could not pay, his wife eventually sued and they ended up in court, the very place they both wanted to avoid for their divorce.
This is why smart and savvy couples use divorce mediation when they have marital property to divide. Our analysis in mediation is always prospective in which we estimate as accurately as possible what the monthly expenses will look like in two separate households after the divorce. This is the one area that I find is the biggest struggle for spouses.
Although we require all of our mediation couples to prepare their own post-divorce monthly budgets, and also a budget for their children's expenses (if it applies), couples trying to do their own divorce are often times not prepared for the shock associated with this financial transition. As a result, they may indeed make agreements around property division, child support and alimony which may not be in line with the actual needs and realities of their new financial worlds post-divorce.
Do-it-Yourself Divorce Money Pitfall #5
Getting caught up in short-term values and costs
Because do-it-yourselfers tend to get caught up in the present of who gets which assets and how much is fair, as well as legal fees, they often times fail to consider what the longer term net worth of these assets are that they each take. Some assets might not be as valuable in the longer term than they thought, while others can carry liabilities which would not be actually realized until many years down the line. Man, if they only knew at the time of their divorce!
One of the biggest things you can miss is the idea that not all assets are created equal. The value of liquid cash or equity in a home versus non-retirement and retirement investment assets cannot be compared equally.
Some assets carry either current or potential tax and penalty consequences upon division while others don't. Nevertheless, you don't want to make the mistake of offsetting these assets equally which are actually not equal in value resulting in a settlement that is disproportionate to either you or your spouse. In other words, without even being aware, you end up comparing and trading off apples for oranges.
Example #1: The Home Buyout Mistake
One example of this is the spouse who acquires ownership of the marital home in the settlement by buying the other spouse out of the equity in the home with a one-time tax-free cash payment. Their initial thought is that they made out well in the settlement because they took all of this cash equity in the asset, subject to future appreciation, which they could turn around and liquidate at any time.
Sometimes, this can work out well. However, in the case of a home that the couple purchased say 25 years ago with a very low cost basis (the sale price they paid), and at the time the spouse sells the house post-divorce, he/she realizes a gain of say $400,000. After the initial $250,000 capital gains exclusion, this spouse will have to pay capital gains taxes (15%-20%) on the remaining $150,000 of profit made on the sale!
Example #2: The Unequal "Apples for Oranges" Trade-Off
Another example of this is trading off equally cash equity in a marital home with value in a retirement fund. If the home is being acquired by one spouse who plans to live there for several years and is not ever likely to incur a capital gains tax upon a future sale, he/she takes all the equity in the home tax-free, both present and future-acquired, while the other spouse takes a retirement asset which he/she will have to eventually pay taxes on. Yet spouses, not being aware of this, think they are trading off assets of equal value when they are not.
In conclusion, my general advice is, at the very least, consult a professional as part of your DIY divorce process.
Two parting thoughts:
- Do your initial research so you aren't overwhelmed at the consultation or when you make the initial call. But, do not rely on everything you read online as gospel as much of the information you read may not be accurate or even apply to your situation.
- Recognize upfront which areas of your settlement you both feel 100% comfortable with on your own, while identifying those areas that are clearly over your head where it would be necessary to work with a professional. Professionals may be an attorney, attorney-mediator, tax accountant, financial and estate planner, certified divorce financial analyst, a therapist or divorce coach.
Be cautious adventurers as you tackle the murky waters of divorce, and remember: this is not the time to be proud or cheap. Just one critical error can cost you and your family for many years to come.
Confused by well-meaning family and friends about your divorce?
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ABOUT THE AUTHOR
Cris Pastore, Esq. is co-founder and managing attorney-mediator at Main Line Family Law Center, a divorce mediation firm with seven offices along the Main Line and Center City, Philadelphia. A practicing attorney for over 20 years, Cris has focused exclusively on divorce mediation since 2007, when he grew increasingly frustrated by destructive nature of the court-contested divorce process. Cris has made it his personal mission to revolutionize this area of practice to preserve family relationships and help families emerge healthy and whole. Follow Cris at @healthy_divorce.