Should I Divorce During the Recession? [2010-04-05]
Since the fall of 2008, the American economy has been in what some refer to as “The Great Recession.” No one really knows where these economic times are headed. The world seems to have avoided a second Great Depression, but nonetheless, everyone is taking time to ponder what these economic conditions mean.
More and more, new clients want to talk about the timing of their divorce with the recession still continuing. The purpose of this article is to discuss some of the economic and personal aspects involved in the decision of when to divorce.
I WANT A DIVORCE
Whenever a client states a clear goal of wanting a divorce, it is time to proceed with a divorce. This goal to divorce may be accompanied by other goals, such as needing protection from domestic violence, increasing the amount of money available for personal budget or expenditure, or the simple emotional need to end an irreconcilable, broken marriage. If the goal to divorce is clear, steps should be taken to realize that goal regardless of whether there is an ongoing recession.
THE VALUE OF MY BUSINESS IS DOWN
Economic recessions do affect the fair market value of assets. Whether it is your home, your business, your retirement account, or any other asset with a fair market value, there has likely been a change in value. If you are the party who wants to receive the business in the divorce, then divorcing during periods of low fair market value may be advantageous. If you are the party who wants to receive a cash payment from the business, then divorcing during a recession may not be advantageous. If you are the party who wants to receive another asset, such as the marital home, you may or may not have advantage during the recession if the present fair market value of that asset is not assured to remain at its current level. The fair market value of an asset may be falling and may continue to fall. On the other hand, the fair market value may be moderately stable and expected to rise at a moderate rate in the near future as the recession abates. No one, however, has a perfect vision of the future.
As part of your divorce, it is appropriate to talk to appraisers and other professionals who can help you determine present fair market value. A real estate appraiser can appraise the home. A business appraiser can appraise the business. Occasionally, even in a recession, there is a remarkable increase in the value of specific assets, such as gold or other commodities, which may then rapidly decline as normal economic activity returns.
THERE IS NO GUARANTY OF FUTURE MARKETS.
There is no guaranty as to future fair market value for the asset whose present fair market value may be affected by changes in the economy. For example, you could be a party seeking all of the retirement account, only to find that it takes another hit in market value. There is no guaranty that market values will keep going up. There is no foreseeable time or degree to which markets will readjust. Declines in fair market value may occur suddenly with very little public warning.
I NEED SPOUSAL SUPPORT (ALIMONY)
During recessions, incomes tend to decline. If you are a dependent spouse who expects to receive spousal support, your former spouse’s ability to pay is related not only to his or her income, but to his or her assets as well. There are a variety of ways to assess a party’s ability to pay. Your financial need is based on your budget, your lifestyle, and your anticipated future needs.
A forensic expert, such as a CPA, can help with a cash flow analysis of both parties’ incomes. A cash flow analysis will consider a “normalized” income for each party, optional levels of spousal support, and a deduction for the resulting income taxes to each party. This cash flow analysis will help both establish need and the ability to pay.
In Iowa, child support is determined by a shared income model. On our website we have an information sheet on the child support guidelines which you should look at. If both parties’ incomes are down, it will affect the calculation of child support. However, if a self-employed individual experiences a temporary decline in income, the court may average several years (usually three to five years) of prior earning history to determine the individual’s income for child support purposes.
DIVORCE NOW & MODIFY LATER?
An equitable distribution of property is not modifiable once a final Decree is entered by the Court. The amount and term of spousal support, the amount of child support, and custody are modifiable if there is a later substantial and material change of circumstances. The Court may modify a Decree based on the facts occurring since the entry of the Decree. One cannot predict future facts with any more certainty than one can predict future economic value.
WHAT SHOULD I DO?
This brings us back to where we started. If your goal is to obtain a divorce, pursue your goal and assess the facts and economic circumstances knowing that you do not possess a crystal ball of economic foresight.