All in the Family: Economy and divorce

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By Daniel R. Stefani
Katz & Stefani

With the decline in the financial and housing markets, as well as the credit crisis, I am asked almost every day about the effect on the divorce world.There is no shortage of anxiety in my business, but when you throw in today’s economic woes, the emotions of the family unit are often out of control.

In talking to my partners, clients, colleagues, and domestic relations judges, it seems that today’s economic environment is having a significant impact on new divorces and pending divorces in several ways.

There is a slight decline in the filing of new divorces in the recent months; most recently, however, it may have more to do with the time of the year rather than the economy. The holidays typically bring a slowdown in new divorce filings, which then pick up after the first of the year. Some attribute this year’s apparent slowdown to people’s hesitation to file, figuring they will ride out these tough times and wait until their home equity and investments rebound.

The age-old problem of maintaining two households versus one is exacerbated by people’s net worths being emasculated. Thus, exiting a marriage is now even more complex. People in the midst of a pending divorce find themselves and their attorneys having to approach a solution to their issues with an entirely different view.

People already divorced find themselves unable to live up to their obligations to pay alimony, child support, private school, camp, extracurricular activities and the like, let alone being able to maintain the family standard of living. Recipients of alimony are finding it harder to find employment to become self-sufficient. As a result, there is an increase in post-decree litigation.

As an overlay to all this, the cost of litigation remains high; litigants should become increasingly aware of the economic benefit to resolving their differences by agreement. Divorce litigation is typically funded by a home equity line of credit, savings, investment income, or employment income.

These sources are much less available in many instances, forcing the litigants to take another look at what is a realistic expectation in a divorce, rather than spending what little they have left on attorneys.

Public policy dictates that divorce litigants should financially disentangle. However, the new reality is that allocating certain assets to each spouse has many inherent inequities.

The challenge now is finding a solution that spreads the risk between both parties. For example, if the retirement assets are down 40 percent and the home equity has all but dried up, divorcing spouses can divide the retirement in kind and the spouse leaving the marital home can maintain a continuing ownership interest until the home is sold in better economic times.

This allows a divorcing couple to achieve their economic split now while maximizing the potential to recoup their losses in the future.

With respect to support issues, in order to maximize the disentanglement, the court would typically average the payor’s historic base pay and bonus amounts and set going-forward support based on what the payor earned in total income.

Now, more often than not, the support payor who typically received annual bonuses on top of his or her base pay runs the risk of no longer receiving the bonuses. As such, in setting the payor’s ability to pay support, a reasonable solution is to set support based on the base pay and have a certain percentage of any bonus to be paid as additional support if, and when it is received.

The valuation of a closely held business is one of the most difficult issues facing the high net-worth divorce litigant. Illinois law is clear that all assets are to be valued as close to the trial date as practicable. This allows the court to consider circumstances literally up to the date of the close of proofs of a divorce trial. The problem is that valuing an entity is obviously a moving target; the expert needs to use a valuation date in advance of the trial to finish the valuation report.

Certainly, once the report is finished, if there are subsequent market conditions or other events that significantly affect value, there can be testimony at trial as to the events that may impact value.

In these volatile times, there is even less certainty that either party’s expert reports will be accurate at the time of trial. As such, courts should give even more latitude in allowing evidence of recent events to be adduced at trial.

With this economic downturn, divorce litigants who had their judgments entered several years ago in better economic times are making payments to their spouses over time based on now-inflated values. These payments are non-modifiable and the prior divorce litigant suffers the consequences.

Some would argue that this is the best time to be filing for divorce because business values are generally lower given the economic times.Those litigants who will now try to ”time” the market in terms of when to file for divorce should be aware that by the time the new divorce litigant gets to trial, it could be several years out and the market may rebound by then.