Family Values: Top Five Reasons the Recession Could Impact Your Divorce, As Seen in The Town Topics, Princeton, NJ (June 2009)
Jan L. Bernstein
Financial stressors are among the leading contributors to marital strife. With a continuing difficult stock market and the downturn in the real estate market, many families are feeling the strain of tough economic times. For those couples contemplating divorce, today’s economic circumstances are perhaps especially significant. Below are five major reasons that the recession could impact the decisions you make when you proceed with a divorce.
1. Lower Home Values
For many families, the marital home is the largest and most valuable asset. Many couples cannot afford to support two households-the former marital home plus another home for the spouse who moves out-even in a better economic climate. Selling the marital home will, in most circumstances, take much longer than has been historically necessary. Thus, maintenance of the marital home for a longer period of time may need to be contemplated.
Even for those families who do not need or want to sell the marital home, valuing the marital home is necessary to equitably distribute marital assets. For example, the spouse who moves out of the marital home may give up his or her interest in the home in exchange for retaining other assets. With home values bottoming out, however, there is less equity to distribute between the spouses. Spouses might consider jointly retaining the home even after divorce until the real estate market returns to better levels. However, protection against creditors of your former spouse during this post-divorce period is critical. Unfortunately, for couples who are now “under water” such that the value of their home has dropped below the principal balance on their mortgage, there is no asset to distribute, only a debt. As a result of the mortgage crisis, it is also more difficult to refinance the mortgage to make payments more affordable for the spouse retaining the home, or to remove the name of the other spouse from the mortgage during a buyout of the home.
2. Devalued Retirement Accounts
Retirement accounts-401(k) and 403(b) accounts, IRAs, and pensions-are typically the next largest asset. Therefore, the values of the marital home and retirement accounts are sometimes offset against each other in the equitable distribution process, so that one spouse receives the marital home and gives up his or her interest in the marital retirement accounts, and vice versa. In today’s stock market, division of losses may be as important as division of equities. One answer to the dilemma of dividing a de-valued retirement securities account may be to divide it “in kind” rather than to divide its current “value.” Then, each spouse rises and falls with the future market. One must be sure to divide the equities taking into consideration the tax basis.
3. Dwindling Assets
Non-deferred stock portfolios, stock options and other financial assets have shrunk during the recession as well-meaning that there is simply less in the marital “pot” to distribute to each spouse, and that there are fewer assets with which one spouse may buy out the other’s interest in a large, illiquid asset such as the marital home. With the crisis in the credit market, it is also difficult to obtain loans that may allow one spouse to pay off an equitable distribution credit owed to the other party.
4. Unemployment and Underemployment
Supporting two households is difficult for two families even in a sound economic climate. With many families having absorbed the layoff of at least one income provider, there is less income available for support of the children and/or a spouse entitled to alimony under New Jersey law. A laid-off Wall Street executive may be “imputed” an income for purposes of calculating support, based on his or her historical earnings, even if he or she is not working or is working at a job that pays significantly less than previous employment. Maintaining good records of a thorough and ongoing job search is critical to the payor spouse to show income should not be imputed to him or her. As long as that supporting spouse remains unemployed or underemployment, he or she must make ends meet in other ways, just as if the family stayed together, for example by liquidating assets. Neither spouse is necessarily “stuck” with the support level set at the time of the divorce. New Jersey does allow a former spouse to seek a modification-upward or downward-of his or her support (or support obligation) upon a showing of permanently changed circumstances.
5. Timing and Strategy
The best way to proceed with a divorce in today’s economic climate will differ from family to family. To some extent, how and when a couple proceeds depends on many factors, including the value of marital assets and the cash/income flow of the family. However, other factors continue to be important, such as whether there is abuse in the household, whether the home environment is healthy for the children of the marriage, and whether the spouses can maintain an amicable relationship. Tough economic times are typically harder on marriages in trouble. Rare is the couple who can mutually agree to divorce but also potentially delay the division of assets until asset values increase. An experienced family law attorney at Phillips Nizer LLP can help you determine your best course of action depending on your own circumstances.