Divorcing in New Jersey? Beware of these four financial pitfalls

Divorcing spouses should avoid common financial errors, such as pursuing the wrong assets, budgeting poorly, being shortsighted and creating extra expenses.

Divorce can have huge impacts on a person's financial security, both in the short and long term. Sadly, in addition to unavoidable legal costs and sudden increases in living expenses, many divorced adults may face financial setbacks that result from common errors during the settlement process. As a result, it is critical for people getting divorced in New Jersey to recognize and avoid the following pitfalls.

1. Disadvantageous asset division

Under New Jersey law, divorcing spouses are entitled to a division of marital assets that is equitable, but not necessarily equal. When spouses choose the wrong assets to pursue, however, they may end up with an agreement that seems fair but is disadvantageous to one party. To avoid this outcome, spouses should keep the following concerns in mind when dividing property:

  • Taxes. Some assets carry a much larger tax burden than others. For example, two retirement accounts with apparently equivalent values may have very different worth if one was funded post-tax while the other was tax-deferred.
  • Real costs. Assets such as real estate may come with hidden expenses - for instance, property taxes, insurance premiums and maintenance costs - that are not associated with other assets of comparable value.
  • Perceived value. Certain property, such as the family home, has a high perceived sentimental value. This may cause spouses to pursue this property even if doing so is not financially beneficial.

In some cases, working with a financial adviser may help spouses better assess their immediate financial needs, the property that they can afford to keep and the assets that are not reasonable to pursue.

2. Forgotten costs

It is not uncommon for people to make financially questionable decisions during divorce because they underestimate their upcoming costs. It is crucial for spouses to have a clear idea of their legal expenses as well as budgetary changes that will occur post-divorce. Many costs, including housing and insurance, may rise, and spouses also may face other unexpected expenses. For example, parents who are sharing custody may need to spend extra money to maintain bedrooms, toys and clothing for their children at both residences.

3. Small-picture thinking

Many spouses may focus excessively on one aspect of the settlement without looking at the larger implications. For instance, a higher-earning spouse may be reluctant to pay limited duration, rehabilitative or lifetime alimony, and he or she may make this a central issue during the divorce. However, since alimony is tax-deductible to the payer, a settlement in which a higher alimony award is offset by a more even division of property might actually benefit the paying spouse.

4. Vengeful mindset

During high-conflict separations, some spouses may see the divorce as a chance to exact revenge. However, protracted fighting can directly harm each person's financial interests, since higher legal costs can reduce the assets left to be divided between both parties. Therefore, it is important for spouses to choose their battles carefully and even consider cost-efficient alternatives to litigation, such as mediation.

Unfortunately, spouses who are cognizant of these financial missteps may still have difficulty avoiding them. As a result, most people who are navigating divorces may benefit from working with an attorney to pursue a reasonable and financially favorable settlement.