Divorce and Economic Recession

Originally published in the January 2009 issue of the King County Bar Association Bar Bulletin. Reprinted with permission of the King County Bar Association.

They started to fight when the money got tight and they just didn’t count on the tears…

Remember that line from Billy Joel’s, “Scenes From an Italian Restaurant”?

Because financial strain is often cited as the number one cause of divorce, it is reasonable to assume the current economic downturn will likely have a negative impact on some marriages and domestic partnerships. While finances are a major factor in a divorce proceeding, economic uncertainty should not be the deciding factor for a client to remain in an unhealthy relationship.

Although couples from all income levels can have difficulties during times of financial stress, the decisions and complications that result from ending a relationship often vary based on income demographics. Some opine that the rich can more easily mask relationship problems with expensive distractions, but when money gets tight the reality of the relationship comes out of hiding - sometimes the couple does not like what they see. For middle and lower-income couples, the strain of making ends meet can cause irreversible damage to a relationship.

The more complicated the marital and separate estates, the more analysis, planning, and multi-disciplinary coordination is required to ensure clients are left well-positioned to embark on post-divorce life. For complex financial divorce cases, pre- and post-petition planning might be extensive, including obtaining valuations, changing wills and estate plans, financial analysis and planning, career planning, etc.

Even amidst economic uncertainty, a divorce is a manageable process with the help of a qualified, committed, and creative attorney.

Timing is Everything

A “market timing” approach might be in the best interests of some clients. For example, during pre-petition planning in a recent case, the wife obtained a valuation of the main community asset - a successful business managed and controlled by the husband. The wife knew husband would buy her out, but she was not happy with the valuation. The wife also knew that a favorable event would occur over the course of the next 12-months and would likely increase the company’s value. Although unhappy in her marriage, she made the cost/benefit decision to wait until the company’s value was higher before initiating divorce proceedings. If viewed from the husband’s perspective in this case, initiating divorce proceedings now and delaying events that would increase value might be in his best interest. Such timing decisions can significantly impact the financial obligations and asset distributions in a case.

For couples with wealth tied to investment portfolios, timing may not be the issue, but rather making sure that division and distribution of investment assets are made not just based on present value, but also in consideration of asset risk going forward. This analysis might require a unique expert who can not only inform the parties and court about present value, but also the value of risk balancing when distributing varying asset classes.

Support and Maintenance Obligations

During uncertain times when incomes might fluctuate considerably or are lower than normal, child support and modifiable maintenance obligations may become impossible to meet. One option is to provide an obligation in support orders for parties to cooperate in periodic exchanges of income information followed by appropriate adjustments to the support obligation. Parties often agree to make spousal maintenance obligations non-modifiable, but in adverse and uncertain economic times, agreeing to non-modifiable maintenance provisions may be unfair and potentially devastating to both parties.

For those who have already been through a divorce and have support obligations, child support obligations can be reviewed as a matter of right every two years or when there is a substantial change of circumstances. An involuntary significant and ongoing decrease in income may constitute a substantial change of circumstances.

Creative Property Distribution Solutions

For couples whose wealth is tied up in the family home, the decision to divorce may be difficult to make. In the current economy, it is likely that either the family home value is less than what is owed, or the home equity or other liquid assets are not enough to fund two separate households. In this situation, the couple might continue to own the home as tenants in common for a period of time until market conditions improve, with one party continuing to reside in the home and the financial responsibilities of maintaining the home equitably apportioned. When using this approach, language in the settlement agreement or decree must be clear regarding when the house will be marketed for sale, how net proceeds are defined and distributed, and the enforcement options for a party who does not ultimately cooperate in a sale.

As asset values decline and incomes contract, the need for attorney creativity and client cooperation becomes more important to achieve reasonable results.