Dealing With Divorce: The Financial Risks Of A Divorce

Divorce isn’t without financial risks. The very nature of the legal process puts both parties at risk of redistributing and, sometimes, losing finances between parties.

While the true cost of the legal process does lie in its emotional costs, families do become blindsided by poor financial planning during the divorce process, too. That’s why it’s important for both parties to plan the financial outcome of their divorce before proceeding with the filing.

The financial risks of a divorce

Before filing a divorce, both parties should already have begun to make steps in separating their financial accounts. This is usually accomplished through closing existing joint accounts (both bank accounts and credit accounts) and opening new individual accounts.

Leaving joint accounts open makes both parties liable and/or at risk of any financial changes (credit or otherwise) that occur after the divorce proceedings begin. Those particular situations, however, aren’t the only financial risks on hand.

Tax implications

Some financial events that occur during a divorce may be considered a ‘taxable’ event by the IRS. The acquisition of property in a divorce settlement, to provide an example, is considered taxable, particularly for parties who would be held accountable for being taxed.

In that case, the party would be held accountable for any profit on a property or specific asset sold from the time it was jointly purchased, rather than the time it was received as a part of the settlement. In other words, parties will be held accountable for taxes if they profit from any assets or property in their name following the time they jointly purchased it.

Of course, both parties should consult a tax accountant or professional for advice about how to handle and manage taxes while divorcing.

Property distribution

The distribution of property is a common convention of divorce. Though, while common, it can get complicated fast. In most cases, both parties (with legal guidance) agree to amiably divide up property and assets in accordance with agreements they may make.

Physical property and assets are commonly included in the ‘equation,’ however, it’s considered more beneficial to take a lump sum payment or any other monetary asset instead of a purely physical asset.

Asset or property depreciation and a failure to receive monthly payments (for an agreed-upon sum) are very real risks in choosing those options over a lump sum payment for a settlement. Ultimately, both parties should choose an option that will respectfully end the divorce and fairly distribute assets or property between parties.