Avoiding Financial Disaster in Divorce

Many people face financial uncertainty when they divorce in Texas. Often, this stems from taking the same amount of income that was previously being used to fund one household and splitting it up to cover two househoulds, including two house payments, two utility payments, two sets of furniture, and maybe even two attorneys. This problem is especially exacerbated when only one spouse works, leaving the other spouse somewhat dependent on the working spouse for money.

The time while a divorce is pending is when you should really tighten the belt and spend only within your means. Now is not the time to go to Neiman’s or have fresh flowers weekly. Prepare youreself now for the eventuality that your standard of living may change dramatically after the divorce is final.

One common mistake people make is considering the divorce settlement to be income used to pay monthly expenses, instead of reserving the assets, retirement and other items received in the settlement for self-improvement, reserves, or rainy days. Doing this will only make it worse when the assets or other funds run out.

When you are deciding on what assets you and your spouse will take, you should be aware that not all assets are equal. One of you may end up with a huge tax bill when you access the assets: for instance, you could end up paying capital-gain taxes upon the sale of your home or your investment assets. In addition, if you dip into your retirement assets, you may end up paying income tax and a penalty. Consider the present cash value of each asset in dividing things up — if it isn’t cash then how hard would it be to convert it to cash.

Other assets may end up being a money pit. Your primary residence, vacation home, or rental properties could cost you a significant amount of money to maintain. Frequently, the primary benefit of a rental property is not necessarily cash flow, but the tax losses that are generated. If you are in a low tax bracket, then these losses may not benefit you to the extent that another investment would. Your expenses may actually increase. For example, if your spouse used to make all repairs, mow the lawn, etc., but now you have to hire someone to do those things, then your expenses will increase. Would you be better off liquidating these properties and investing the proceeds in something that would increase your cash flow instead of creating a financial drain?

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