Top 15 Financial Mistakes to Avoid in Your Divorce Settlement

Learn about the most common financial pitfalls in divorce settlement agreements—and how to avoid them when you're negotiating your own agreement.

By , Legal Editor

Most couples who are ending their marriage reach a divorce settlement agreement at some point during the process. That's a good thing for a number of reasons. Going to trial means that divorce will cost more and take longer. Also, couples are more likely to be satisfied with the outcome of their divorce when they've negotiated and agreed on the terms rather than having a judge decide for them. Still, it's critically important to avoid some of the common most pitfalls in settlement negotiations. Most of those mistakes center on financial issues.

1. Failing to Get a Complete Picture of Your Finances

The biggest mistake you can make is not to have clear, complete information about all of your finances. This can be an issue for all spouses—but especially important for those who've let their spouse handle the major financial decisions during the marriage.

As soon as you anticipate a divorce, you should gather as much information as you can. Track down and make copies of important financial records, including:

  • tax returns from the past few years
  • checking and savings account statements
  • statements from retirement accounts and pensions
  • brokerage accounts
  • loan documents
  • credit card statements, and
  • your credit report.

You should also inspect and take pictures of the contents of any safety deposit boxes you and your spouse have.

Along with gathering a list of all your assets and debts, it's important to get an accurate valuation of the assets, and to understand which are marital property and which are separate property. You might need to get your own independent valuation—rather than simply relying on an expert your spouse has hired—particularly if you own significant or complicated marital assets like a family home, other real estate, a business, and a pension or other retirement accounts.

Once you can see the complete financial picture, you can also avoid the related mistake of arguing over one asset at a time. Your financial future will depend (at least partially) on getting your fair share of the value of all the marital assets, minus the debts.

2. Underestimating Your Post-Divorce Expenses

We don't need to tell you that it's more expensive to maintain two households than a combined one. This is especially true in a time when many divorced parents share physical custody of their children, which typically requires bedrooms for the kids in both homes. Still, far too many people underestimate their post-divorce living expenses. You need to come up with a solid, realistic budget in order to negotiate fair agreements about property division, alimony, and child support.

If you can afford it, a financial expert can help you project into the future (including into retirement years) to learn what it will take to support your current lifestyle.

3. Fighting to Keep the Family Home or Other Assets You Can't Afford

Many couples have bitter fights over who gets to the family home after divorce. Often, these fights stem from an emotional attachment to the house or an assumption that the primary custodial parent should keep the home for the sake of the children.

But you shouldn't let these considerations get in the way of a clear financial assessment: Can you afford a house buyout (which will involve either refinancing or trading other significant marital assets)? And can you afford the ongoing expenses of owning the home? You might consider continuing to co-own the family home for a period of time after the divorce, but that option has financial and other risks.

Similar questions may apply to other assets. Even when you're deciding who keeps the family pet, you'll need to account for vet bills and other costs. As much as possible, your main focus in settlement negotiations—at least when it comes to financial issues—should be to make sure you'll have enough cash for living expenses after your divorce.

4. Ignoring the Possibility of Hidden Assets

Hopefully, you're not in a situation where you distrust your spouse and fear there are hidden assets that should be included in the settlement. But you should be on the lookout for signs that your spouse might be trying to hide assets from you, such as when:

  • your spouse isn't fully forthcoming or cooperative when you start asking for financial records or other details
  • you see unexplained withdrawals or other transactions in your joint accounts
  • there are inconsistences or other red flags in your tax returns over the past few years, including in the areas of trusts, partnerships, or real estate holdings
  • you can't access your accounts online or are no longer receiving statements at your home, perhaps because your spouse has changed the password or address
  • jewelry, art, or other valuable personal property has disappeared
  • your spouse hasn't received expected bonuses or commissions, which could be a result of attempts to delay payments until after the divorce or final separation
  • your spouse's self-employment income has recently declined, which might have resulted from attempts to manipulate and hide that income, or
  • there have been recent, unusual changes in your spouse's business, including an unexplained decline in revenue, increase in expenses, or change in business structure.

If you're worried that your spouse may try some fancy financial footwork during the divorce process, you may ask the judge to issue a temporary restraining order to prohibit either spouse from selling, transferring, or otherwise disposing of any assets (or taking on new debts) without authorization from the other spouse or the court. Some states automatically include these orders in any divorce case. Of course, this won't affect any actions your spouse took before one of you filed for divorce.

There are ways to find hidden assets in a divorce. But if you're in this situation, you'll need a good lawyer and potentially other expert assistance (more on that below).

5. Not Considering the Income Potential and Liquidity of Assets

When you're negotiating a fair division of your marital property, the current market value of an asset shouldn't be your only consideration. For example:

  • Assets that generate income (like rental property or bonds) may be worth more to your financial future than other assets without income-generation potential.
  • If you take mostly illiquid assets (which can't easily be converted into cash) in the settlement, rather than liquid assets like bank or brokerage accounts, you could run into cash flow problems in the future.
  • Be careful to avoid unrealistic expectations about investment returns or future increases in value of assets.

Make sure you're comparing apples to apples when you trade assets in a divorce negotiation, and pay attention to the tax basis, present value, transaction costs, and potential risks involved in different assets. Here again, expert advice help you make this assessment.

6. Failing to Anticipate Debt Problems

Along with dividing your marital assets in the divorce, you'll need to come up with a fair way of dividing responsibility for your debts. But it won't necessarily matter to creditors what you've decided between yourselves (or what's in your divorce judgment). For instance, if you've agreed that your spouse will pay off the balance on your joint credit cards, the bank could still come after you for payment if your ex doesn't follow through. Although you may go back to the court to enforce your agreement, that could take time—and your credit rating could be ruined in the meantime.

You can take steps to minimize the potential for unforeseen debt and credit problems with divorce. For instance:

  • As we've already mentioned, get a copy of your credit report. This will identify all joint accounts, accounts you may not have been aware of, and any potential credit.
  • If at all possible, pay off and close all joint accounts. If necessary, liquidate joint assets to do this, and then refinance any remaining debts in the name of the spouse who will be responsible for paying them.
  • If you must keep a joint account open while your ex is paying off the balance, be sure to keep track of the account to make sure the payments are current.
  • Be aware that even after divorce, both spouses are liable for taxes due as a result of audits on joint returns. The IRS may perform a random audit of a divorced couple's joint return for three years after the divorce, and may question a joint return for up to seven years if there's a good reason to do so. To avoid potential problems with income tax debt, your divorce agreement should have provisions that spell out what will happen if the IRS imposes any additional penalties, interest, or taxes, as well as where the funds will come from to pay for any expenses associated with an audit.

7. Ignoring the Tax Consequences of Settlement Proposals

There can be significant tax consequences for many aspects of divorce—including property division and relatively new federal rules about taxes and alimony payments. You and your spouse can work together with a divorce financial planner or tax accountant to minimize the total taxes both of you will pay during separation and after divorce.

But you might also need to get you own, independent financial and legal advice on how your taxes could be affected by which assets you receive in the divorce settlement. As a general rule, you don't have to pay capital gains tax on property transferred as part of a divorce settlement. (26 U.S.C. § 1041 (2023).) But there are restrictions on the capital gains exclusion when selling your house during divorce. And if you receive an asset as part of a settlement and later find that you need to sell it, you'll may very well have to pay capital gains tax. So you should understand the potential tax consequences before you agree to a settlement.

8. Not Following the Rules for Splitting Retirement Accounts

If you and your spouse both have retirement accounts from your jobs, you might want to take the simplest route for handling them in the divorce—that is, each of you will keep your own account. Or, if the accounts don't have equal value, the spouse with the lower-value account (or none at all) could get other assets to make up the difference.

But that relatively simple solution isn't always feasible. For example, you and your spouse might not own enough other assets to make for a fair property division without splitting retirement accounts. Or one of you might have a defined benefit pension, which makes it difficult to figure out its current value (not to mention its worth in the future).

The rules for dividing retirement accounts in divorce are complicated. And it's important that you follow those rules carefully to avoid unforeseen consequences—including tax penalties or the refusal by a retirement plan administrator to divide funds according to your settlement without a proper Qualified Domestic Relations Order (QDRO). For IRAs, it's relatively simple to request a direct transfer of funds ("incident to divorce") to the other spouse's new IRA account. But you'll definitely need expert assistance if you plan to split a pension or 401(k) account.

9. Not Controlling Insurance for Future Payments

When your settlement will require your spouse to pay alimony, child support, or some other financial obligation after the divorce, it's common for the settlement agreement or judgment to require a life insurance policy that will cover those payments in the event your ex dies. But you should also insist on being the owner or irrevocable beneficiary of the policy. Otherwise, your ex could easily stop making payments on the policy, and you would never know about it until you need the nonexistent benefits.

As the owner or irrevocable beneficiary, you would be notified of any outstanding issues with the policy, such as nonpayment of the premium. Then, if necessary, you could take action (such as going back to the court to request an additional order) to prevent the policy for lapsing or being cancelled.

Learn more about updating insurance policies after divorce.

10. Not Considering Support for College or Other Long-Term Expenses

Basic child support is often the easiest part of settlement negotiations, because it's relatively straightforward to calculate support under state child support guidelines. Although you'll need to get court approval for your agreement, judges usually approve agreements for support amounts that meet or exceed the guideline.

However, the guidelines only address support up to the point when the child support obligation ends in your state (typically when a child turns 18 or graduates from high school). If you're hoping your children can go to college, you should at least try to negotiate for an agreement to continue some form of support to help with higher education. In some states, judges may order a parent to pay postsecondary educational support. But parents in all states may include this kind of provision in their settlement agreement.

Some states require parents to provide ongoing support for adult children who are incapacitated. Even if it's not a legal mandate, parents may always agree to do that.

11. Forgetting the Impact of Inflation and Other Future Developments

Inflation can make a big difference in the value of support payments, especially over the long term. If you'll be receiving alimony or child support (or both), you may want to include provisions to address the impact of inflation on future payments. Without an agreement on this issue, you would generally need to go back to the court to request a modification based on a significant change of circumstances (although the procedure is usually more streamlined when it comes to child support modifications based on cost of living adjustments).

Also remember that you could include a provision in your settlement agreement that alimony will be "nonmodifiable," meaning that neither spouse will be able to request a change later on, regardless of any change in their financial circumstances.

12. Failing to Consider Eligibility for Derivative Social Security Benefits

When a couple was married for at least 10 years before getting divorced, the non-working or lower-earning spouse may be entitled to derivative social security benefits based on the earnings record of the other spouse. These derivative social security benefits after divorce do not affect the higher-earning spouse's social security payments.

When you're negotiating a settlement—especially on the issue of alimony after a long-term marriage—you should take the potential for derivative social security benefits into account. And if your troubled marriage is getting close to the ten-year mark, waiting a while to get divorced could make your negotiations easier by increasing the amount of money available for one spouse's retirement without reducing the other spouse's benefits.

13. Failing to Consider Potential Bankruptcy Consequences

When you're negotiating a settlement agreement that provides for any future payments from your spouse, should you worry about whether your spouse will later file for bankruptcy in an attempt to avoid paying for the settlement? The effect of bankruptcy on divorce debts depends on the nature of the payments—and sometimes on the type of bankruptcy.

  • Support obligations. Child support and alimony obligations that are part of a marital settlement agreement or court order may not be discharged (wiped out) in bankruptcy.
  • Payments for property division. If your spouse owes money as part of a property settlement, those payments probably couldn't be discharged in a Chapter 7 bankruptcy. But in a Chapter 13 bankruptcy, your spouse might be able to discharge debts related to the property division, such as an obligation to pay off joint debts or make cash payments to you to equalize the property division.

Also, it's worth pointing out that your family home could become part of the bankruptcy estate if you continue to co-own the house after the divorce.

If you suspect that your spouse might file for bankruptcy, you should avoid agreeing to provisions for post-divorce equalizing payments, debt repayment, or delayed division of the family home. If the two of you have a lot of debt, you might also consider filing for joint bankruptcy before the divorce to simplify the property division.

14. Failing to Try Mediation—or Rushing Into a Settlement

If you're having trouble agreeing about all of the issues in your divorce, you might be tempted either to give in to your spouse's demands or insist on a full-blown contested divorce and trial. But there's another option you should consider: divorce mediation. A trained, neutral mediator can help you find solutions and identify issues that you might not have considered on your own.

There are pros and cons to mediation—including some situations when it's not appropriate—but it's at least worth considering in most cases. And if you can reach an agreement in mediation before you file for divorce, you can take advantages of the cost savings and other benefits of an uncontested divorce.

15. Not Getting the Right Expert Advice

If your financial situation is relatively uncomplicated, you and your spouse may be able to draw up a settlement agreement on your own. And if you use a service to file for divorce online, the questionnaire can help guide you through the issues you need to include. But it never hurts for each of you to have a divorce lawyer at least review the agreement to make sure you haven't left out something important or inadvertently given up your rights. Paying a lawyer for an hour or two now could potentially save you a lot of money and headaches down the road.

However, if you have any of the financial complications we've discussed in this article, you'll probably need—or at least benefit from—expert advice before you agree to a settlement, including:

  • a certified divorce financial analyst (CFDA) or other financial expert who can provide in-depth analysis of your finances, as well as the tax consequences and long-term effects of a settlement.
  • a mediator with training in the financial aspects of divorce
  • a real estate appraiser
  • other valuation experts who specialize in certain types of assets (like businesses), and
  • a QDRO expert to prepare an order for splitting retirement accounts.

Finally, you may need to have an experienced family law attorney handle your settlement negotiations in some situations, including when:

  • your spouse already has a lawyer
  • you or your spouse is filing for a fault divorce rather than a no-fault divorce
  • you've started the contested divorce process but hope to settle before going to trial, or
  • you've experienced domestic abuse.

(Learn more about how to know whether you can handle your own divorce or need to hire a lawyer.)