Common Financial Mistake Made During Divorce

An article last month in the Wall Street Journal titled “Don’t Let Divorce Leave You Illiquid” explored what one expert says is one of the biggest financial mistakes he sees during a typical divorce. The problem has to do with the division of assets and the tendency for one spouse to be left with large but illiquid assets.Divorce FInances House Cash

What does liquid/illiquid mean?

Liquid assets are those that can most quickly be converted into cash and then used to pay bills or cover other expenses. Examples of relatively liquid assets include bank accounts, money market accounts, and even retirement accounts. Illiquid assets, on the other hand, are those that are much harder to convert into cash.

How does one get left with a large illiquid asset?

The most common example of a party being left with an illiquid asset following a divorce involves the marital residence. Given the large value of a typical home, it is often the case that after one party gets the house and the other party is given an equivalent share of the remaining assets (bank accounts, retirement accounts, stocks, bonds, etc.) there is little left. For example, a wife who walks away with a $250,000 home will likely have to hand over an equivalent amount in other assets to her husband (or buy out his share of the home some other way). The same thing can happen in relationships where there is a small business. In order for one person to leave with the full share of the business, the other person will likely get the lion’s share of other, more liquid assets.

So what’s the problem with illiquidity?

The financial expert interviewed in the WSJ article notes that while it can feel like a victory to walk away with the marital home or a small business, the problem is that you can be left in a precarious financial position. When times get tight or you encounter a sudden or unexpected expense, it could put you in a very bad place where you have little if any access to hard currency. For example, if a woman decides to keep the house and gets little else and then experiences a delay in receiving alimony payments, loses her job, or encounters an expensive repair, it can leave her stranded with few resources to cover her new expenses. In these cases, being illiquid can result in a costly fire sale of assets, with desperate sellers willing to take steep reductions in price just to get some cash in their pocket.

Given the troubles that can result from taking large and illiquid assets, it is critical to weigh your options carefully when divorcing and seek the services of an experienced family law attorney. Contact Donna Wagner to set up a consultation and discuss a plan whereby you can make equitable decisions as it relates to finances and divorce.

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