As the housing market fluctuates and a recession looms, economic uncertainty is causing yet another unexpected side effect – more challenging divorces. When the economy is volatile, all the decisions and disputes in a divorce become more charged and present greater risk. Is it smart to keep the marital home at its current value? Does the settlement agreement address inflation to protect the purchasing power of support payments? Should child support increase even if the payor’s income hasn’t? Who bears the additional cost imposed by inflation? Will the stock account hold its current value? It all boils down to one central question: “Am I really getting a fair deal?”
Dividing the Marital Home
Divorcing couples who purchased their homes pre-pandemic will likely be faced with difficult decisions about how to split the marital home in the current economic market. In many areas of the country, housing prices have decreased over the past year. Worse, increasing inflation presses mortgage rates higher, further threatening home values.
If one spouse plans to retain the marital home for the long term, the potential short-term reduction of the home’s value may not have any economic consequence. However, if a spouse intends to keep the home for only a couple more years until a child graduates from high school, a significant decrease in the home’s value after the divorce settlement may greatly disadvantage that party.
For example, if a wife keeps the marital home (valued at $2 million) and at the time her last child graduates from high school two years later, it is now worth only $1.3 million, that may have a great impact on her financial circumstances if she did not receive significant other property in the divorce. Plus, she will now also solely incur all costs of sale of the home (e.g., brokers’ fees, transfer taxes, capital gains taxes). It may be a wiser decision for her to sell the home now and find alternative housing arrangements, instead of retaining a depreciating asset with significant costs to maintain it. What may have been a simple division a few years ago in a stable housing market could become a drawn-out dispute due to recent economic changes.
Even if the spouses have agreed for one to buy the other out of the home, higher interest rates may create another significant problem. The spouse keeping the home might now need the other spouse to remain on the mortgage for several reasons. The spouse keeping the home may be able to afford the carrying costs with the current mortgage. But if he or she needs to refinance the mortgage to remove the other from liability, a new mortgage will likely bear a much greater interest rate and make maintaining the home unmanageable. Or, even if the new mortgage payments might be manageable, he or she may not qualify for a new mortgage in his or her individual name.
Plus, as a couple goes from supporting one primary household to two, all the increased day-to-day costs resulting from inflation make the transition more difficult. Suddenly, a second rent or mortgage payment, doubled utility costs and two grocery bills present a greater hurdle.
Overall, the decision of which assets to retain becomes more complex in a turbulent economic environment. Often, a party going through divorce has no experience making these decisions and has a limited financial background. It is important for divorcing litigants to receive intelligent advice from their lawyers and financial advisors to make smart decisions.
Spousal and Child Support Awards
Inflation has also had an impact on child and spousal support awards. A support award agreed to today may provide significantly less purchasing power four years from now for the spouse receiving support. For example, a $10,000 a month award will not be worth the same amount in four years if inflation is 10% per year over the course of the next four years.
Spouses receiving support should consider strategies to ensure their award maintains the same value and provides consistent purchasing power. Couples might consider building in occasional support adjustments against an objective index, such as the Consumer Price Index (CPI). The Bureau of Labor Statistics publishes several CPIs that may be useful for divorcing couples.
That said, tying support to the CPI provides considerable protection to the spouse receiving support. But it could create issues for the payor spouse. If the payor spouse’s income does not increase at the same rate as inflation, then increasing the support by the CPI may negatively impact their available income. One potential solution is to provide that the support amount is increased by the CPI, but it never increases more than any increase in the payor’s income. For example, if the CPI goes up 9%, but the payor’s income goes up by only 4%, the support amount only increases by 4%. Other potential solutions are to put a cap on any increase in support (such as no more than x% annually) or to agree to automatic, predetermined increases by dollar amount or percentage at set time intervals.
Bitcoin and Cryptocurrency Investments
One final wrench that can get thrown into modern-day divorces is the popularity of investments in Bitcoin and other cryptocurrencies. In a divorce, crypto is an asset like any other – it must be disclosed and distributed between spouses. However, it does create a new pathway for spouses to attempt to hide assets. Although the blockchain is publicly accessible to anyone, there is no way to identify the people behind the transactions without additional information. If one spouse is not familiar with the other’s crypto transactions, it can be more difficult for them to identify those hidden assets.
In situations where one spouse suspects the other of hiding cryptocurrency, it may be necessary to retain a forensic accountant or computer forensics investigator to track down those assets. Although blockchain technology intentionally removes some identifying information from transactions, the average person will likely leave clues about their financial dealings. Evidence might include declarations of losses or gains on prior tax returns; bank account statements and Venmo transactions that show transfers to crypto accounts; handwritten notes of crypto passwords and keys; and computer software or records that point to a crypto “wallet” (where crypto may be stored electronically).
When divorces involve crypto assets, spouses should carefully consider its volatility during negotiations. Couples generally have three ways to divide these assets – one spouse can buy the other out for the cash value of the crypto; one spouse can simply transfer half of their crypto to the other; or couples can agree to sell the crypto on a certain date and split the net proceeds of sale. Since the value of crypto can fluctuate wildly, couples should take extra care when determining when to sell it and which manner of division best fits their situation.
Divorces don’t happen in a vacuum. Economic conditions have always influenced how finances are handled in divorce. But especially now, divorcing couples should consider the impact of inflation on their division of assets/liabilities and support agreements.