Recession Divorce Checklist

What do you need to know to negotiate your way through a divorce during times of increased economic pressure?  In the current economic downturn, things have changed and not for the better. In the past many families had a good deal of equity built up in appreciated homes. For some, retirement funds also had considerable appreciated value. These two, the marital home and retirement funds were usually the major assets of middle class families. Until recently, after divorce mortgage funding was more readily available for the purchase of smaller replacement housing or to refinance the existing mortgage and remove the former spouse from liability on the existing mortgage. Alternatively, one spouse might buy out the other, using a compensatory share of other assets, usually retirement funds.  Further, joint credit card debt could be rolled over into separate accounts in the name of each former spouse, often with low teaser interest rates that helped with monthly cash flow. Of course, none of this was easy. Under the best of circumstances, few families could live at the same level, once they moved to two separate households.
  
Today, more couples are facing marital strife resulting from the financial pressures of higher property taxes, resetting higher mortgage payments, and higher costs of fuel, food and other living expenses. Credit card debt interest rates are climbing --- even for people who pay regularly each month.  Home equity loan interest rates are also increasing.   Opportunities to refinance credit card and automotive debts into the marital home mortgage have all but vanished in many instances due to the decline in home values.  This pressure adds to the existing relationship problems that families experience leading up to separation and divorce.
  
The bad news is that getting divorced is no magic panacea to relieving the financial pressures you are experiencing.  In fact, you will also experience the added financial pressure of legal and court costs to reach the settlement, whether it is an agreement or a court ordered outcome, as part of your divorce.  Both financial and emotional costs may be reduced by mediating rather than litigating your divorce. However, if you can’t afford to live now under the same roof, you should not expect that a Superior Court Judge or mediated agreement is going to be able to change the financial realities with a divorce judgment and property settlement agreement. You may replace the daily arguments about how to adjust spending and how to deal with creditors, with a court order or written agreement allocating those responsibilities between you and your spouse. It may simplify some things when child support (if you have children), and alimony (in appropriate circumstances) become known and reliable quantities that allow you to plan realistically.  But, most divorce settlements will not relieve you of obligations to your creditors. In a few cases, a settlement arrangement will provide for payment or refinance of debts and remove you from liability. But, that usually requires an offset from other assets, assets like equity in your home which may have markedly decreased. 
 
The good news is that there are smarter and better ways to get through this process in times of financial distress.  Here are some recommendations:

1. If at all possible, work together with your spouse, rather adversarially, to face the financial difficulties, and work out a plan to deal with the existing household and family finances.  This is not easy without help, especially if the last person you want to cooperate with/trust is your about-to-be ex-spouse. So use a professional to help. Work with a mediator, a financial advisor, your accountant, marriage counselor or even a mutually trusted friend with the skills to make the best of your existing financial situation.  Facing the realities is more difficult for some than others.  Running two households costs about 40% more that running one. So, you both have to cut back. Money is a complex emotional topic even when a relationship is fine and economic times are good. So, these will not be easy conversations and may well require several tries.

2. Be cautious before terminating lines of credit.  Make agreements about acceptable use or limits on use of the credit lines/credit cards, but don’t terminate them.  You may not be able to replace that credit once it is terminated.  The same goes for open home equity lines of credit.  Terminating lines of credit that are in good standing will lower your credit score which translates to higher interest rates for future borrowing. Open lines of credit and credit cards may offer you more flexibility in the structure of your final settlement.

3. If the reality is that once the marital home is sold, neither will be able to replace it with another home, then consider these options before you agree to sell it. 

(A) What housing do you want for your children?  Can you afford to maintain the existing home for your children under arrangements that would not have been so traditional in better economic times?  For how long?

(B) What will it cost for you or your spouse to maintain housing for your children under alternate arrangements, including rentals and living with extended family?

(C) Is there any way to live separately but under the same roof?  Establish a separate room for each of you with privacy assured by locks and agreements and quarters for the children.  Not everyone can live this way, but many did during the last housing downturn until the market improved and they could obtain an agreed price for the sale of the home.  And, yes, once you have a written agreement about what will happen to the marital home, you can get divorced without selling the house. Further, appropriate language in a divorce agreement may preserve the $250,000/each capital gains exclusion for you both. So when the house is sold, neither of you loses a good part of your equity to taxes.

(D) If refinancing is not possible to remove one spouse from liability on the existing mortgage, but the carrying costs are manageable, and the equity in the house can be offset by the out-of-the-house spouse (or former spouse) retaining more retirement assets, the in-the-house spouse can assume responsibility for the mortgage so long as it is paid on time each month. There should be an agreement to protect the out-of-the-house spouse or former spouse that requires the home to be listed for sale if the mortgage is ever 60 days behind.  The spouse-out-of-the-house will probably not qualify to purchase another home while the existing mortgage is unpaid.  Remember though, we started with the assumption that neither spouse would be able to purchase housing if the marital home were sold.

(E) In higher income situations, sometimes a couple can purchase two homes using their joint credit --- and if they divorce, each spouse can agree to own/live in and maintain one of them --- with the rest of the income and assets allocated by child support, alimony and equitable distribution. 

(F) Two people can continue to own the marital home after divorce and assign the right to live in it and obligation to pay for it between themselves.  Years later when housing values may have recovered and more options are available, the home can then be sold, refinanced, or bought out.  In the meantime, the children may have grown and the problem of how to adequately shelter them and keep them in good schools may have been solved by continued joint ownership of the marital home.  A co-owner out of the house who pays toward the mortgage interest and property taxes (perhaps in lieu of alimony or child support) can continue to deduct the mortgage interest and property taxes attributable to the payments.  In a higher income situation this can help reduce federal taxes in a way that otherwise would not be available if the home were sold and both people rent thereafter. 

(G) Think outside the box.  Could the house be leased for a year or two and the mortgage and taxes paid by the rent? Is there a wealthy relative who might be willing to provide additional credit by co-signing or offering funds previously obtainable from a bank? If the house has to be sold at a major loss, is it possible to arrange a short sale with the creditor?

(H) Look ahead to what your alternative housing will be and what is available for your former spouse and your children.  For many the outcome may be fairly harsh in middle and lower income situations given the current cost of living in New Jersey.  Rents increase when property taxes increase.  Sales of marital homes sometimes bring on out of state relocation issues for children that otherwise would not exist if the marital home could be maintained a few years longer. There may be some way to do that if you can cooperate with each other.

4. Carefully explore the alternatives and options before committing yourself, your children, or your spouse (former spouse) to one direction.  Avoid short term actions that limit long term alternatives for one or both of you.

5. While you are still in the same household and your combined costs are the lowest, work together to pay down debt, starting with the highest interest rate first. 

6. Each of you will need health coverage when you are divorced.  The least expensive way to obtain this is through group employment. Kids are covered on many group policies at relatively low cost. When making changes to your employment and income, look for employment that will offer you the ability to participate in group health coverage. The transition can be aided by “COBRA” coverage available from larger employers, whereby the uncovered spouse is eligible for continued coverage at slightly over the group cost for individual coverage. Most “COBRA” plans last about 36 months after a divorce. So, pre-existing conditions will be covered for up to 36 months,  and you will have time to get a new policy.

7. We may all be working beyond age 65 or 66 to cope with the increasing costs of living if we are able to do so.  If you are returning to the workplace, retraining, or have employment choices to make, consider employment that can accommodate your ability to work beyond what you might have expected would be retirement age.  Pick employment in areas that are growing and that will accommodate reduced hours/ part-time work as an older employee within that field.

8. Do not force the liquidation of housing and retirement assets while the values are low if that is not the best financial decision under the circumstances.  Consider options that allocate assets in kind, or share the risks of both assets changing values into the future, whether short, medium or long term.  No one has a crystal ball to accurately predict the future.  Diversification is a safer course in most instances with each person retaining a portion of each type of marital asset.  This may work against one person keeping the marital home outright, however.

9. Do you try to shelter the children from the financial downturn or do you use this as an opportunity to teach them how to get through tough financial times and enjoy simpler things in life?  You may want to involve older children in frank discussions about which activities are the most important to them and what they would suggest as less expensive alternatives, such as ideas for  “home based family vacations” or game night, or bike riding.  The simple phrase, “I’m sorry, but we can’t afford it,” can provide important learning for children. If you have strong difference on how this may impact your children, talk with a family psychologist to get professional input on how best to approach the realities with your children.  Put together a united approach and don’t be blameful.

10. Mediate, mediate, mediate, mediate, mediate.  Get your own independent legal advice, but spend the effort and resources you have working through these issues and getting to agreement in mediation where you get more for your money.  Independent legal advice is very important so you know the realistic range of options out there for you.  You get more bang for your buck in mediation if you both approach it in good faith, and are straight forward about your income, expenses, assets and liabilities. The outcome will be better for you, your former spouse, and your children.