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Avoiding financial disaster after a divorce

Divorcing couples in Texas might do well to take some time to assess their finances so they can avoid some of the typical pitfalls involved in marital property division. Each spouse's financial needs will affect the division of assets in the divorce. If one spouse needs cash in the immediate future, he or she can request assets in the divorce decree that are easy to liquidate. Spouses who do not need instant cash have more flexibility in negotiations because they can accept retirement plans, mutual funds, stocks and other investments that take longer to cash out.

The couple should also attempt to eliminate any outstanding liabilities before the divorce settlement, such as credit cards and auto loans. Larger debts such a mortgage typically go along with the spouse who receives the property, but the two parties may also agree to split the obligation in different proportions. Any debts that cannot be paid off in time should be transferred to the spouse who will be responsible for them after the divorce.

Special consideration should be given to the tax consequences of disposing of assets and debts. An equitable split in divorce court can turn out to favor one spouse if the balance of taxable and non-taxable assets is lopsided. Cashing out retirement plan assets will also trigger early withdrawal penalties if the spouses are younger than 59 1/2 years old.

One of the best ways to avoid surprises during a divorce negotiation is to consult a family law attorney at the start. The attorney can outline the options and financial consequences of each decision. Requesting a credit history can also help by making both parties aware of all credit cards, auto loans and other obligations that were initiated during the marriage.

Source: MarketWatch, "Divorce? The 6 worst money mistakes", September 23, 2014

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