At present, divorcing couples are being required to make decisions in the midst of an environment marked by uncertainty and even confusion. In addition to stock market volatility, rising interest rates, and inflation, couples are also facing the lingering impact of Covid-19 complicated by respiratory illnesses, and all exacerbated by continued political angst and tension. Clearly the solutions of yesterday will need to be reframed and redesigned to take into consideration that times have changed, at least for the here and now.
At the Centre for Mediation and Dispute Resolution, we have always encouraged a problem solving approach to making decisions and reaching settlements. We recognize that when emotions are fraught and clouded, embracing rational thought and analysis may seem out of reach. However, based on decades of experience in mediating divorce settlements, we have found that the problem solving approach is not only preferable but in fact, is quite achievable.
This article is intended to call your attention to the current landscape facing divorcing couples and some of the particular issues that will best be handled with a “thinking out of the box” approach to creative problem solving. Admittedly you cannot stabilize the stock market or wish inflation away, but you can, and should, weigh the impact of all decisions on each of you—not just emotionally and personally—but also economically. Agreements based on questionable data or wishful thinking rarely produce the results you planned for.
Consider the following examples of challenges currently facing divorcing couples:
INFLATED HOUSING VALUES:
- If you are planning to sell the marital home and each rent an apartment, the increased value of your home may prove advantageous, albeit rental prices have likewise escalated.
- However, if one spouse is buying out the other spouse’s interest in the home in order for him/her to purchase another residence, then the questions arise: Am I buying you out at a value that will decrease when stability returns? And the other spouse questions: Do I have to buy a lesser house since housing prices are inflated? Will that property also decrease in value?
MORTGAGE INTEREST RATES:
- The spouse who is being bought out probably needs to be taken off the mortgage in order for him/her to qualify for securing a mortgage for his/her purchase. Since mortgages cannot be transferred from two names to one without refinancing, in all likelihood the refinanced mortgage will have a significantly higher interest rate than the existing rate. And, too, the spouse purchasing a house will be securing a mortgage at current high rates.
- In addition to the issue of higher interest rates, the spouse who is remaining in the house may need to take money out of the house (cash out) in order to buy out the other spouse’s interest. Cash outs often result in higher mortgage rates.
- If the spouse being bought out does not intend to buy now, perhaps he/she can stay on the mortgage with provisions specified as to how the mortgage will be paid and by whom, and for how long will the parties be co-borrowers.
- Perhaps an installment plan can be devised for the buyout with specified payments over time.
- Or perhaps the buyout sum can be paid by trading other assets.
- If assets are going to be divided such that like assets (e.g., brokerage accounts) are being divided by percentage shares and not cashed in, then the current losses in the stock market will not be actualized by the division. The account balances may have decreased but the losses will not be cemented by cashing in holdings.
- However, if assets do have to be cashed in, in whole or in part, in the settlement of property, and the values have declined due to the market, then you are dealing with devalued holdings. If an account had $100,000 and it has decreased in 2022 by 20%, then you need an additional $20,000 to pay $100,000. In this case, should you think of other alternatives, such as borrowing against assets to make payments, with the hope that the asset value of your account will return to prior or near prior levels?
- If you have been forward thinking and saved for your children’s college education and they are entering college in the near term, do you draw from these accounts that have lost value recently, or do you consider other options for securing schooling costs?