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Seven financial mistakes to avoid during a divorce

Divorce is a costly business at the best of times, but in an era of economic uncertainty, things can get ugly fast.

Detached homes in the Greater Toronto Area fell in value for the first time in years in the 12 months before July 2022, and experts are predicting that is just the beginning of a market correction that could knock up to a quarter off the price of Canadian homes by the end of the year. And all this comes as soaring inflation and higher interest rates are squeezing family budgets harder than ever.

There is light at the end of the tunnel for recently separated Canadians: a recent survey found that almost three-quarters of divorced people felt like they were in a better financial position after their split.

Still, in my experience, most people coming out of a marriage need some guidance in order to take control of their finances, which is why one of my first pieces of advice to clients is to find a good financial planner. 

For those who can’t wait to get started, here is my list of seven financial mistakes to avoid during a divorce:

1 Spending sprees

The time immediately before and after a separation will be among the most uncertain periods of your financial life, and the best way to ensure you come through it unscathed is by maintaining the status quo. 

This is not the time to trade in your minivan for a Porsche or to go wild on your joint line of credit. Anyone who thinks they are getting one over on an ex-spouse will be in for a rude awakening when they discover that any debts accrued for their own benefit after the date of separation belong to them alone.

2 Closing joint accounts and credit cards too early

Refraining from abuse of your joint accounts doesn’t mean you have to stop using finances shared with your spouse altogether during a divorce. 

Financial separation tends to be a lot messier than physical separation from a spouse, and there is a strong chance you will have ongoing commitments to meet, particularly in the early days of the split.

In keeping with the status quo theme, joint accounts can be a convenient way to meet these shared financial obligations, and they may even prove useful in the longer term if you and your spouse share children.

3 Hiding money

Attempting to hide assets during a divorce can be just as damaging to your finances as it is to any remaining trust between you and your former spouse. 

We ask our clients entering alternative dispute resolution processes for a commitment to full and frank financial disclosure, not only because it is fair, but also for their own protection — since hidden money can almost always be uncovered. 

Separation agreements tend to include clauses that void the settlement in cases where one party can show that the other has hidden assets, which means that the whole process starts again from scratch, but in a much more hostile environment. 

4 Withholding support

Spousal and child support are among the most hotly contested issues in any divorce. There’s no need for one party to begin making payments immediately after a separation unless one spouse is entirely dependent on the other, but once an order has been made or an agreement reached, withholding support can result in provincial oversight of payments. 

Moreover, once arrears begin accumulating, it can be challenging to catch up, and Ontario’s Family Responsibility Office has some serious enforcement tools at its disposal – including garnishment of wages and suspension of driving licences or passports.

In any case, it just looks bad. If you want to make a negative impression on the judge hearing your case, there are fewer safer bets than refusing to pay after racking up a sizeable bill for outstanding support.

5 Assuming the size of your divorce settlement

Conventional wisdom says that divorcing couples split their assets down the middle, but the reality is a little more complicated. 

In fact, Ontarians are generally only entitled to an equal share in property acquired during the marriage, subject to certain deductions and exceptions. The special status of the matrimonial home adds another wrinkle to equalization calculations, depending on what property each spouse brought with them into the marriage and when — or if — it was sold. 

Problems arise when people make big decisions or purchases — like a new house — based on erroneous assumptions about what they are owed by a former partner, which is why it’s important to get legal advice on your rights and obligations early and not rush to acquire a new home until you better understand what your financial situation will be when the dust settles. 

6 Rushing into a pension-house swap

In many divorces, particularly those involving a teacher or public servant, the two largest assets at issue are the matrimonial home and one spouse’s generous pension. 

In these scenarios, it can seem convenient for one party to keep their undivided pension in exchange for their interest in the house.

There is nothing wrong with a pension-house swap in principle, but both parties should make sure they understand their rights and think carefully about the current value of these assets and what they will be worth in the future. 

Being house poor in the current real estate market can be a very financially onerous situation, and inversely, if the spouse who keeps the home has no retirement savings of their own, they could be setting themselves up for financial problems later in life as it’s not easy or efficient to access funds from a property without selling.

7 Unsecured support

Death is rarely a favourite topic of divorcing couples, but it needs to be near the top of the list where one party owes child or spousal support to the other.

Life insurance as security for support payments is a key tool for family lawyers negotiating separation agreements, ensuring that payors can meet their obligations to their children and former spouse in the event of their untimely death. 

Unfortunately, I have seen cases where a support payor died without life insurance — either because an agreement was never reached or because they never got around to organizing a policy — and it is always heartbreaking, especially where children are involved. The tragedy of a death in the family can be compounded in these cases by a protracted battle over the deceased’s estate.

If you are facing a separation and would like to discuss your options, I’d be happy to hear from you.

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by Stephen Morgan

Stephen Morgan practices exclusively in family law and is highly skilled and experienced in litigation. He aims to guide clients through a difficult and stressful time in their lives with understanding, support, and practical advice.