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Avoid divorce settlement blunders

Elizabeth MacBride, Special to CNBC.com
Sunday, 3 Nov 2013 | 7:00 AM ET
Mike Kemp | Rubberball | Getty Images

When Suzanne Meredith was seeking a divorce in 2005, she was lucky to talk to two friends—a family lawyer and a counselor, who told her about a relatively new option: collaborative divorce.

With the aid of lawyers and mediators, the physical trainer and her ex-husband, an architect, navigated a difficult visitation negotiation without resorting to court.

Meredith thereby avoided litigation, one of the biggest financial pitfalls of divorce.

She opted for a collaborative route not primarily to save money, she said, although she knows it's likely she did save tens, if not hundreds of thousands of dollars by not going to court.

She did so, instead, to minimize conflict. Her sons were then 9 and 13 at the time.

"Nobody wins in a divorce," said Meredith, 57, who lives in Del Mar, Calif. "I knew I wanted my kids to grow up emotionally healthy."

Divorce is one of the most disruptive events in someone's emotional and financial life and can be especially difficult for the lower-earning spouse, most often the woman.

(Read more: Gay divorce dilemmas)

For instance, the U.S. Census Bureau found in 2009 that 22 percent of women divorced in the preceding year were living in poverty, compared with 11 percent of recently divorced men.

And the negative financial impact of divorce can be lasting. A 2011 University of Connecticut study found that, in the long run, women who divorced and remained single had less economic security in retirement than women who remained married or remarried.

But there are ways to minimize the damage to your finances during a divorce. Below are four common pitfalls of the divorce process and ideas for avoiding them, according to financial experts.

Pitfall 1: Taking a case to trial when you don't need to. Almost 900,000 marriages ended in annulment or divorce in 2011, the latest year for which data are available, according to the Centers for Disease Control and Prevention.

Only about 5 percent of divorces end up in a full-blown trial, said Justin A. Reckers, CEO of Pacific Divorce Management, a firm that provides divorce financial planning services.

But those divorces that go to trial can easily cost hundreds of thousands of dollars.

(Read more: 'Til death (or economic recovery) do us part)

Some divorces—those involving, for instance, abuse or high-conflict personalities—truly need to be litigated. For most, however, there are other options.

Under the collaborative model that Meredith used, both sides typically stipulate that they will avoid court. (Using the model, however, doesn't necessarily guarantee you stay out of courtrooms forever: After their divorce was final, Meredith said she and her ex-husband later went to court over support payments.)

To add teeth to a collaborative divorce agreement, the professionals involved—lawyers, financial advisors and therapists—all commit to walking away from a client who reneges on the deal.

You can also consider breaking your case into chunks, such as property, visitation and legal custody, and settling each, piecemeal, over time.

Mediation—not to be confused with collaborative divorce—typically involves hiring a neutral third-party and is usually the least expensive option. It can be as inexpensive as a few thousand dollars; interview a few mediators before you settle on one.

"For most people, this is the largest financial transaction that you'll participate in [in] your life," Reckers said. "You need to surround yourself with people who can help you make deals."

(Read more: Divorcing boomers double their retirement woes)

Pitfall 2: Ignoring the tax implications. When you are working on your financial settlement, allow for the fact that not all assets are created equal. For example, $100,000 in a retirement account is not the equivalent of $100,000 in cash; there will be taxes due on retirement assets when you transfer them.

"You should be thinking of the net after-tax result," said certified public accountant and attorney Marilyn Niwao, first vice president of the National Society of Accountants and president of accounting firm Niwao & Roberts. Consult an accountant to get those answers.

Pitfall 3: Not gaining a full financial picture. Inevitably, you'll find it difficult to get your hands on certain financial information. How much did your spouse squirrel away in that separate account? What about his or her trust fund? If your spouse is less than forthcoming, it's worthwhile to pursue this information—legally.

A full understanding of all finances involved will help guide your decisions about what you want to fight for. It will also help you recognize a fair offer when you get one—not only because you'll know how much your spouse can afford but also, and more importantly, how much you need.

(Read more: When unmarried couples split)

"Put a dollar value on everything you're fighting over," said Debbie Marson, a certified divorce financial analyst with Investment & Resource Planning Associates, a financial planning firm.

Pitfall 4: Letting your emotions rule. It's crucial that you make rational, not emotional, decisions.

"It's a business transaction; when emotions cloud judgment, you make mistakes," said attorney Stephanie Blum, certified family law specialist at law firm Reuben Raucher & Blum and co-author of "Divorce and Finances."

In situations where there was infidelity or where there's already a new partner in the picture, emotions are especially apt to be counterproductive.

—By Elizabeth MacBride Special to CNBC.com

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