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Financial pitfalls to beware of in divorce

On Behalf of | Oct 1, 2020 | Divorce |

Spouses that go through a divorce have the task of dividing their marital property between them. This can be a stressful time, so it is easy for a divorcing couple to neglect some important financial planning. People may end a marriage but also come out of it with more debt and financial obligations than they had expected.

Sometimes financial pitfalls are not so obvious. They may arise later on, after a divorce is complete. People who know these pitfalls are out there may be able to work them out during the divorce and spare themselves some financial losses once the divorce is complete.

Debt obligations

Divorcing spouses can work out who will pay off debts that they share through a divorce settlement. To take an example, one spouse may keep the family home and thus assume the responsibility for paying off the mortgage. However, as Forbes points out, a divorce decree does not change the financial obligations the spouses have towards a creditor.

This means that even if one spouse takes the family home, a bank may still come after both spouses for debt payments. Other creditors like credit card companies may insist on payments from both spouses if the couple has joint ownership of a credit card. Spouses need to work out such issues with creditors and not expect that a divorce decree will resolve everything.

Hidden taxes

Even if it two different assets have the same value, it does not mean that the federal government will tax them equally. Forbes explains one example involving a traditional IRA and a Roth IRA. Both have an equal balance, so it seems each spouse can take one of the IRAs and satisfy a fair division of assets. However, the recipient of the traditional IRA will have to pay as high as 35% in taxes to get the money while the spouse receiving the Roth IRA will have to pay nothing to reap the balance since the Roth IRA has already completed its taxation.

The problem of hidden taxes could mean that one spouse loses out on more money in the long run even if the asset division seemed fair at the time. A divorcing couple may also lose out on money in taxes if they do not divide retirement accounts correctly. So checking for tax consequences in advance may be of great benefit and prevent unnecessary payments and losses.