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Common Divorce Mistakes
1. Becoming a Victim:
a. If you suspect a pending divorce, gather (or copy) important paperwork and safeguard it outside of the home (preferably at the office of your attorney). This paperwork would include: financial records, tax records and returns, pay slips, day care records, credit card and other bills, bank statements, investment records, property records, car records, insurance records- life, health, dental, and other insurance.
i. Also by gathering the required paperwork in advance, your attorney’s fees could be reduced by saving time. Your attorney will have to file a financial affidavit in Iowa before a decree is issued, and the documentation will assist in that preparation.
b. Protect assets: If you suspect that your spouse is disposing of assets, notify the holder in writing that a divorce is pending and that assets must await court distribution. Get a court order to protect the assets. Carefully watch bank, brokerage accounts, and other liquid investments, and the cash value of insurance.
i. Keep track of marital assets and separate assets. Assets that you brought into the marriage or that you acquired outside the marriage such as an inheritance may be separate assets and be awarded to you in the decree. Marital assets are considered for division during the divorce.
ii. Make a list of all assets. Don’t be generous about assuming that your ex can have certain assets- put them on the list, then tell the court he can have them.
iii. Leaving the home before an agreement can be a problem. Once you leave the home there is little incentive for an agreement. Also, often the party with the home gets awarded physical care of the children. See an attorney before leaving the home. But do not assume that the custodial parent must have the house.
iv. Consider proper valuation of assets. One of the major issues in divorce is the valuation of assets. Keep paperwork on asset value. Hire appraisers to properly evaluate assets. Value all assets before you agree to take them.
1. Even if assets are worthless today, they may become valuable later. Stocks may become extremely valuable in the future. Consider division of even worthless stocks. After all, the value now is near zero which should cost you next to nothing in the balance.
c. Protect debts: Ensure that debts are being paid. Decide who is paying what bills. If necessary get a court order to pay bills. Protect your credit during a divorce. You will need credit following the divorce and often credit has been based on joint bill paying in the past. You will need to untangle your credit and establish your own credit immediately to rebuild your credit record.
i. Pay off marital debts before the divorce. Waiting until after the divorce when the debts are equitably distributed could create problems if the other party defaults. You will still be liable for the debt and will have to go after your ex in court yourself to recover your losses.
ii. Ensure that all debts are divided. You need to be protected against the possibility that your ex will continue to run up debts on joint accounts. Close all joint accounts. Never be responsible for your ex’s debts. It can seriously affect your credit. Creditors are not bound to the court agreement, although the parties are. You will still be responsible for your ex’s debts if you did not close all joint accounts even though the court made him responsible during the divorce.
d. Custody: Courts in Iowa look at the best interests of the children. Often the best interests (at least on a temporary basis) are to keep the children in the home and in place. Thus, often, the spouse who has custody of the children at the time of the divorce proceedings, keeps custody afterwards. If you can keep the children in your custody and in their home, you stand a better chance of gaining custody.
2. Not Considering Taxes: Look at all settlements to minimize your total taxes. Divorces in Iowa are based on equitable distribution- not equal, but equitable. Taxes are not often considered in the equitable consideration. Work to reduce the amount of taxes and don’t forget that both parties are liable for taxes due on joint returns. Evaluate all settlements on an after-tax basis. Common tax problems include:
a. Not understanding 72(t)(2)(c) section of the tax code regarding retirement plans
i. IRS rule states that any monies coming from a qualified plan to the nonemployee spouse be distributed without incurring the 10% penalty if this person is less than 59 ½ years old. However taxes are paid on it, since it is income. If the monies are transferred from the qualified plan of the working spouse to an IRA (which is not a qualified plan) for the non-working spouse, and a portion is then withdrawn, the 10% penalty will then apply, in addition to taxes.
b. Not understanding, or making mistakes on Qualified Domestic Relations Orders (QDROs), losing retirement benefit rights when retirement funds are divided
c. Payments can be considered by the IRS to be alimony instead of child support if not properly developed.
i. Child support is not taxed, but maintenance and property settlements are taxed.
ii. Alimony can be deducted for the payer and taxable to the recipient, but property settlements cannot be deducted.
iii. Alimony that ends about the time of the child reaching the age of 18 or emancipation may be considered child support.
iv. Alimony that decreases dramatically over the first three years may be subject to recapture and can become non-deductible and taxable.
v. Certain installment payments for property can be considered as alimony under IRC71 of the tax code.
vi. IRS rules can dictate how alimony must be properly structured. Thus it is crucial that good tax advice be received to determine how to restructure alimony properly.
d. Not considering the tax basis in property
i. The tax basis is usually what it cost you to obtain the property(and may include the costs to maintain the property)
ii. When the property is sold, there is a tax event, which could lead to a capital gain or loss which can be taxed (based on the tax basis, not the current value).
iii. If you take stocks, consider capital gains you might pay in the future.
iv. Consider the tax gain on a house if you have to sell in the future.
e. Paying tax on interest of property settlements
f. Not getting credit for carry forwards on tax returns
g. Determine how taxes will be filed for the tax year of the divorce.
3. Not Considering Your Budget: In a divorce, your household income is decreasing, and a realistic budget needs to be developed. Financial considerations are often unrealistic for surviving after divorce. Finances will be tight.
a. Often, bankruptcy follows a divorce and the effects of a bankruptcy must be considered on a divorce settlement (property settlements can be discharged, but alimony and child support cannot be discharged). Regardless if bankruptcy follows or not, a realistic budget must be developed to determine living expenses and for legal purposes (to determine if spousal support is required, etc.)
b. One of the biggest concerns is the house. The house is often an emotional issue and not a financial consideration. Consider the post divorce budget as to whether the house is realistic. Additionally, if equity is in the house, by keeping the house, the equity might have to be distributed to the other party. Assets must be available to distribute the equity. If forced to sell the house after the divorce due to financial reasons, the party could have a large financial gain which is limited for tax purposes, when he/she could have had a larger tax free gain prior to the divorce, costing the party money.
c. Additionally selling the house after the divorce can create problems, leading to contempt. Often a “sell by” date is stated in the settlement, or a particular price is decided on in the settlement. The market can change overnight and the house can be worth more or less very quickly affecting the bottom line. Make sure that insurance covers your interests.
d. Don’t have one spouse living in the house and the other making mortgage payments. This can lead to a disaster. You may have problems selling the house, foreclosure, need for eviction, etc.
e. Health Care Options- You need to consider your health care options after divorce. Often the ex maintained the health insurance which will now disappear following the divorce.
4. Letting Emotions Rule: Emotions run high during a divorce. Greed and revenge often taint the divorce, especially if one spouse has a new friend. Often the goal is to destroy the ex, but that is not the goal of the legal system.
a. Iowa is a no fault state, and a divorce can be obtained merely by showing that the marriage is broken and cannot be repaired (one party can merely state that). No grounds are needed, so proof of cheating, etc. is often counterproductive and merely increases the emotional levels.
b. If the parties can keep emotions out of the proceedings, the proceedings can be shorter and less expensive.
c. Counseling may be needed to help. Your attorney can help, but he is not a therapist. He is hired to help you in your divorce. You may have emotional attachments to property, but may not be able to afford the property or have rights to the property.
d. Listen to the attorney who will provide a non-emotional point of view. Additionally, attorneys often charge more than therapists, financial planners, or other professionals. Don’t overuse your attorney for therapy as your bills will run up dramatically with calls and visits to your attorney for emotional calls.
e. Reasonable actions should be sorted out from emotional actions. Thinking strategically can lead to better decisions.
f. Don’t harm your case by being vindictive. Denying visitation, destroying assets, or other vindictive acts can harm your case. A calm approach will likely have the upper hand over a vindictive party.
g. Don’t rush into an act with emotion. Think calmly about the results and talk over the results with someone like your attorney prior to acting.
5. Too good Settlement: A divorce settlement is a compromise based on equitable distribution. Property is not equally divided, but is equitably divided. However, a one-sided or too good to be true settlement could be a red flag for a problem. Bankruptcy could be planned in which a property settlement would be discharged. Even if bankruptcy doesn’t occur right away, a default could be likely down the road, or could lead to a failure to pay. Be realistic. Secure all payments with assets transferred to you immediately or insurance to protect payments.
a. Clients should be realistic about the divorce. Divorce distribution is based on equitable principles. You often will not get everything you want, nor will you lose everything. Custody is the only issue that is often a “win or lose” situation because the child cannot be split and one party will usually get physical care and one party visitation.
b. Failure to recognize the status quo can be a problem. Courts are reluctant to change the status quo. The party with the children usually keeps the children. The party with the house usually keeps the house. However, property is equitably divided.
c. Not understanding complexities of Pensions:
i. Pension plans must be valued and evaluated under the plans vesting and eligibility rules. Federal and employer rules govern division and distribution options and may have very specific requirements as to language that must be included in the Qualified Domestic Relations Order (QDRO).
ii. If paperwork for distribution orders is not expeditiously filed following a divorce, the spouse may lose his/her rights, especially if remarriage is involved.
iii. Military and government pensions have special laws and are complex. Not following the law can cause a loss of benefit rights.
iv. Making mistakes on QDRO’s can cause loss of benefit rights. Plan documents must be carefully reviewed prior to drafting the QDRO. Some plans do not allow QDROs and take precedence over court rulings. An expert should review the plan prior to developing the settlement.
v. Not understanding the tax consequences of pension plans can create mistakes.
d. Don’t be overly generous with a settlement, especially with the thought that you might later get back together. This is a business deal to split your assets.
e. Do not make an Oral Agreement. Too often couples will make an oral agreement that will have no effect since a written agreement later will have a clause stating that the written agreement is the full agreement. Too often an oral agreement will also cover items that the court will not consider valid, such as eliminating child support if you….
f. Common Mistakes in a Settlement Agreement:
i. No Specific Parenting Schedule
ii. No Provision for Discussion of Geographic Moves
iii. No Provision for Domestic/ Overseas Travel
iv. No Provision for Future Elective Medical
v. No Provision for Potential Impact of Loss of
Employment or Disability
vi. No Provision on Method to Handle Future
Disputes and Expenses
vii. No Provision for Changing Parenting Time
Schedules with the Age of the Child
viii. No Provision for Discussion of Future College
Choice and Costs
ix. No Details as to Transportation to and From
g. Never sign an agreement thinking it can be changed later. Sometimes it may be convenient to settle quickly thinking that you can fight later in court. However, the agreement is a legal document and can bind your interests later in court.
h. Secure support payments. Get insurance or an annuity paid for by the ex to secure all support payments in the event of death or nonpayment.
6. Not considering inflation: Consider inflation in all settlements. You need to consider the effect of inflation on a child’s education, your retirement, and other long-term goals.
7. Not checking the paperwork: While your attorney is the legal expert, he can and does make mistakes. Failure to notice the mistakes could create problems for your case. Discuss every aspect of your case with your attorney. Your attorney works for you, but does need your cooperation and assistance. Your attorney cannot do it alone.
8. Failure to communicate with your spouse: Too often communication stops, especially if children are involved. Communication will often become bitter and vindictive.
a. Often a better settlement for both sides can be reached if the spouses are cooperative and communicating. Remember, property will be divided equitably anyway. It is not necessarily a win or lose situation. Usually joint legal custody will be awarded, but unfortunately only one party will get physical care and one party visitation.
b. Be realistic about the chances. Often I can tell a party how the court will rule when they walk into my office. It is emotions that distort the reality, costing unnecessary legal fees and creating hostile situations between ex’s. Understand however, that if communication was perfect, you wouldn’t be getting a divorce!
9. Not getting good legal advice. Don’t ask friends or relatives for legal advice. Often that is inaccurate or old wives’ tales. Divorce is based on equity and equitable principles. No divorce is the same, so what happened to your best friend during his/her divorce doesn’t really matter for your divorce.
10. Bringing a Friend around too soon. If children are involved, custody can be influenced by your bringing a friend or friends around the children during the divorce proceedings. The friend’s background becomes an issue and can be utilized in court to determine custody. Having sex in the home with children in the home can be viewed negatively by the court. This will also upset the ex and create problems with communication and with visitation/custody issues, as well as confuse the children.
11. Not telling your attorney the entire truth. Be honest with your attorney. Tell your attorney the good and the bad. Your attorney represents your interests and cannot defend your interests if he/she doesn’t know the entire story. Being surprised in court can lead to a defeat in court. Often a client ignores the truth. By telling your attorney the entire story, he/she can sort out the “truth” and better prepare your case.
12. Not Changing your will and all financial obligations. Many items such as wills may be automatically changed by law following a divorce, but don’t depend on all financial obligations being changed.
a. Change beneficiaries on life insurance policies, bank, investment, and retirement accounts or your ex may get the asset if you die.
b. Insurance may possibly show the ex as the beneficiary (and maybe for good cause such as covering property settlements, child support, etc.) and other documents may not change. A will leaving everything to your spouse by statute in Iowa changes so that the ex is cut out, but it is better to rewrite the will. Have all of your finances reviewed during and after the divorce to ensure that your interests are protected.
13. Having sex with your ex. Often spouses will try to “reconcile” or “just have sex together”. This can cloud judgments and lead to emotional attachment issues where the other spouse is just using the other. While a true reconciliation is ok, avoid any reconciliations that don’t have a prayer. Focus on the future and what you really want. Closure needs to happen in your case and sex just clouds that closure.
14. Considering the divorce as combat. Equitable principles apply in a divorce and you need to consider the divorce as a business deal. Your attorney should not be combative, as that can often lose your case. He/she should clearly represent your case to the judge, but being combative can merely upset the judge. Children should not be used as pawns in the struggle. Respect should be due to all parties even your ex.
a. Compromise. Do not become uncompromising. Courts like to see realistic compromise and hate to see unrealistic inflexibility and this can affect the outcome. Parents seem to be especially inflexible concerning the children during divorce. The law states that the children are entitled to both parents and both parents have rights to the children. Inflexibility can lead to a loss of custody and is one of the factors considered by the court for custody.
b. Combat merely increases the cost of the action. A combative attorney often generates increased costs with little increased results.
15. Using your child as a Middleman. Children are stressed during this period. They should not be put in the middle of the “battle”. They love both parents and should be encouraged to continue to love both parents. Failure to encourage cooperation with another parent can be grounds for denying custody as well as making the child uncomfortable.
a. Avoid using the child to send messages to the other party.
b. Children in the Middle classes are required for parties with children affected by the divorce and will emphasize ways for parents to cooperate.
c. Email and texts are ways to send messages without involving the children if the parties don’t want to talk on the phone directly.
d. Don’t criticize the other parent in front of the children or ask them to spy for you.
e. Don’t withhold child support due to a lack of visitation privileges. The issues are separate issues. Withholding child support or visitation can place you in contempt regardless of the activities of your ex.
16. Treating your child as an Adult. Do not compensate for the loss of your ex by placing your child in the role as an adult. The child may initially like the extra attention, but it is depriving your child of his/her childhood and will have negative effects.
17. Not keeping a journal. Many issues are often happening fast and furious during a divorce. Often the ex is violating terms of court orders. Keeping a journal with dates, times, and witnesses will help document these violations.
18. Sending child support directly to the ex. In Iowa, payments are ordered to be paid directly to the court or to Child Support Recovery Services. Sending payments directly to the ex can lead to a court case to recognize whether you paid or not. The ex will typically claim that you did not pay child support and you will have to prove that you did pay. Simply providing copies of checks may not be enough proof since the checks could have been for other purposes such as house payment, gifts, etc. Nonpayment of support is one of the major reasons for a contempt show cause hearing.
19. Spying on your ex. Laws cover spying even on your ex. Do not intercept emails, text messages, phone conversations, etc. You may in one party states, such as Iowa, record your phone conversations with your ex. However, that is not the law in two party states where both parties must give permission for recording. Breaking the law can have criminal penalties, lead to the exclusion of evidence, and lead to the loss of custody of the children.
20. Domestic violence. Domestic violence is a crime and can lead to criminal prosecution. Additionally it can lead to loss of custody rights and other difficulties during your divorce. If the situation is volatile, keep away from your spouse and situations where you are one on one with your spouse. You may need to contact a Family Violence Center or the County Attorney for support.
21. Representing yourself. While you have the legal right to represent yourself during a divorce, the legal issues can be complex. If your spouse is represented, you need to be represented. A divorce will affect your life for years afterwards, especially if children are involved. Violation of the divorce decree can lead to contempt and to a possible jail term.
22. Not knowing what is happening in a family business. A family business can be a divisible asset during a divorce and too often the spouse does not understand the family business. You should obtain copies of family business legal and financial documents, understand who does the accounting and legal work, and important aspects concerning the business.
23. Considering that all financial responsibility for your spouse ends with the filing for divorce. This can be a critical mistake. Cancelling insurance can cause problems in court. Failure to pay debts can shift the equitable balance in the distribution of assets and can affect custody.
24. Not waiting until wife is eligible for husband’s Social Security. If the parties have been married 10 years or more, a wife is entitle to receive ½ of her ex-husband’s Social Security retirement and his Social Security payments are unaffected. It makes no sense to divorce at 9.6 years of marriage when waiting 6 months would increase retirement options for the wife with no effect on the husband.
25. Not resolving all issues during the divorce. The divorce should finalize the separation. If issues are left out of the decree or settlement and not resolved, you can anticipate a return to court later costing additional legal fees. You do not want an endless battle. Issues that you are concerned about, need to be resolved at the time of divorce.