Why might the wealthy choose to get divorced during a recession?
We’re in April, 2020 and in the midst of a pandemic and perhaps the beginning of a recession. Recessions cause financial problems, and financial problems cause marital stress. Also, recessions can provide a financially palatable exit point for the higher earner in the marriage.
First, if your marriage can be saved, you owe it to yourself and your family to try to make it work. If you haven’t already, you and your spouse can explore individual and marital counseling. Quitting on your marriage should generally not be your first option.
But if you’ve either tried to save your marriage and failed or are convinced that it’s beyond repair, you unfortunately have to go through the uncomfortable exercise of thinking about how you’re going to make this necessary change and when.
If you’re the earner in the marriage, you may be thinking, “Why would I want to lose assets and potentially have to start paying support when my income and assets are shrinking?”
But if you’ve already decided you’re going to get divorced, it’s not a question of “if” you have to face these issues, it’s only a matter of “when.”
That’s where the current state of the economy comes into play.
First, if you’re the earner in the marriage, getting divorced during a recession may allow you to lock in a reasonable rate of support. Both child support and alimony are based mainly on the high-earner’s income. And during recessions, people are unfortunately losing businesses, jobs, and income at an alarming clip.
Settling a support issue during an economic downturn allows you to lock in a fair order that may remain in place for some time while your income climbs. Of course, child support and alimony are modifiable (unless the parties agree to lock in alimony). And the order should be fair. However, it’s generally better to start an order at an income nadir than during a peak.
For example, if you get divorced during an economic boom and there’s a minor decrease in income afterward, you’re not necessarily going to be allowed to decrease your alimony. This will depend on a number of other factors, which include the recipient’s financial needs.
Of course, there are limits to this. If you’ve historically been the primary earner, it’s unlikely that you’ll be able to resolve your case with an alimony or child support calculation based on your unemployment income, and certainly not on no income at all.
However, setting a fair support amount after the proverbial s#*t already hit the fan reduces your risk of having to pay support above your means in the years ahead.
A recession may also present opportunities in the area of property division. During recessions, the values of businesses, homes, retirement accounts, and other assets typically decrease. This provides greater flexibility in negotiating division of those assets.
For example, businesses are considered “property” in divorce, and in some cases, the person keeping the business may have to “buyout” the other spouse. Because earnings are generally down for most businesses during a recession, the value of the business is usually lower at that time. The lower the value of the business, the lower the buyout amount. Note that this isn’t true for all business: some businesses actually thrive in economic downturns. But many business are hurting during a recession.
Another example is if an individual wants to keep the marital home as part of the divorce. If fewer people are buying and home values are decreasing, the buyout amount you will have to pay the other spouse may be also lower.
The key is that in dividing property, it’s easier to execute buyouts when the assets are at a lower value point. This is exactly what happens to most assets during a recession—they lose value.
Of course, there are other important considerations besides finances in determining when to start a divorce. For example, if you have children and parenting time is at stake, you should factor that into your decision. Similarly, if you have a child that’s close to going to college and you want to minimize disruption now, you may want to hold off on filing.
But strictly from a mathematical and financial perspective, divorcing during an economic downturn may provide an opportunity to reduce long term-financial risk on the issue of support and to gain flexibility in dividing your property.
If you have any questions about divorce or on the timing of a divorce filing feel free to contact us.
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