What Are the Financial Mistakes to Avoid after Divorce

While divorce can be an emotionally trying time, the financial impact of divorce can last years after the heartbreak. Before you sign a divorce settlement, be sure that you get competent legal advice from an experienced family law attorney. Know what financial mistakes to avoid after divorce.

Holding onto the House

Many spouses are terrified of the thought of losing their home. They may hold onto this asset desperately, often exchanging more liquid assets for the home. However, it is important for spouses to understand that the true value of their home is not necessarily equal to having the convenience of having that  amount in cash today. Continuing to own the home may be outside of a party’s financial wherewithal and they may over extend and become “house poor,” limiting their ability to meet their other expenses.  Sometimes keeping the home pays off in terms of later resale value but, as was seen during the housing crisis of 2005-2009, if the market falls out, this asset may be worth much less than the spouse believed. Even if the value stands firm, your asset may cost you more than you thought by having to make costly repairs, pay homeowners’ insurance and pay taxes. The take home message is to think carefully and critically about whether keeping a home is something you really want to do and are really able to do. While retaining a home may be emotionally appealing, it may not always be the best financial decision.

Not Adjusting Spending

After divorce, your expenses may have stayed mostly the same if you did not downsize your life. However, your income may have gone down dramatically by virtue of not sharing expenses with a spouse or having to pick up the cost of your own health insurance. Even if you received spousal support, this may not add up to the monthly income that you were used to. If you do not make adjustments, you may quickly find yourself in debt or not be able to handle your ongoing expenses. It is therefore important to make a budget based on the new circumstances.

Tapping into Your Retirement Funds

You may reach a point where you are having difficulty making ends meet. You might think it would be okay to tap your retirement fund for needs you have now. However, if you withdraw retirement funds before you reach 59 ½ years old, you will have pay a 10% penalty. This penalty does not include the taxes you will have to pay on the additional income you realize as a result of cashing in certain assets. Consider other options instead, like reducing your monthly expenses or downsizing.

Not Using Spousal Support Wisely

Some spouses may be so relieved to receive spousal support that they do not make any immediate adjustments. They may hold onto their previous lifestyle by using these funds. However, many courts do not order permanent spousal support with much frequency. Spousal support may be limited to a certain period of time, such as two or five years. Consider using spousal support in a productive manner, such as paying for job training or a degree program or investing. It is also important to remember that spousal maintenance is taxable income.  That means you will have to claim every dollar you receive on your income tax return.  The effect is that not every dollar you receive is a dollar you will get to keep.  Unlike employment income that will have a portion withheld for your federal and state taxes, you will need to proactively save a portion of your maintenance income in order to buffer any tax liability you might be hit with when you file your tax return.

Doing it Alone

Divorce is a complicated financial and emotional process. It is important that you have an advocate who can protect your legal interests during divorce. Contact an experienced family law attorney at Udall Shumway for help.


This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice regarding Financial Mistakes to Avoid after Divorce, or other family law issues, please feel free to contact 480.461.5300, log on to udallshumway.com, or contact an attorney in your area. Udall Shumway PLC is located in Mesa, Arizona and is a full service law firm. We assist Individuals, families, businesses, schools and municipalities in Mesa and the Phoenix/East Valley.