Recession and Divorce [2010-06-10]

IDFA 2010 Survey: Recession and DivorceThanks to all of you who responded to our request to complete a survey about the effects of the recession on your CDFA practice in this Spring! As promised, we’re going to share the results with you.

Of the 192 CDFAs who completed the survey, 69% said they had seen clients who could not afford to get divorced because of recession-related financial problems.

  • 57% said that this represents an increase over previous years
  • 40% reported a decrease in the number
  • 3% said that the number had remained constant

When asked to assess the difference that current economic conditions have made to the number of new divorcing clients coming through their doors, 39% say that the recession has not affected the number of cases, and 25% say that the recession has increased the number of new cases they’re seeing (these numbers compare with 43% and 19% respectively the previous year). Of those who had seen an increase, 75% experienced an increase between 1% and 25%, and 15% experienced an increase between 26% and 50%. The most common reason cited for the increase was the clients’ desire to reduce the cost of their divorce. Other common responses included:

  • Economic climate is straining marriages
  • People are exploring the financial feasibility of being able to divorce before they file or see an attorney
  • An increase in mediated and Pro Se divorces using CDFAs as financial neutral.

Of the 38% who said the number of new divorcing clients coming through their doors has decreased, the most common reason cited for the decrease was fear: fear of the economy, job loss, losing (or not being able to sell) their homes, and of not being able to make ends meet without their spouses. Other common responses included:

  • People are afraid to divorce while they’re unemployed
  • Clients can’t afford to divorce until the economy improves
  • Not enough money to hire a financial expert
  • People just can’t afford to live apart – especially if the matrimonial home is “underwater” (meaning that they owe more on the mortgage than the house is currently worth).

In terms of the housing market, our survey respondents provided a ray of hope that we’ve reached bottom and may be on the way back up: 70% said the market has remained the same over or improved the last year, and only 30% said it has deteriorated.

However, the market is still pretty grim for divorcing homeowners: 22% percent of respondents told us that the number of clients whose matrimonial homes were “underwater” has increased dramatically over the last year. An additional 34% said that the number had increased slightly, and 24% said that the number had remained the same. Eighteen percent of respondents do not presently have clients with underwater houses, and only 2% report a decrease in the number from the same time last year.

Sixty-seven percent of respondents told us that the current housing market has forced them to come up with creative solutions to property-division problems when the matrimonial home fails to sell – or would sell for less than what clients still owe on the mortgage; this number is down from 73% the year before. The most common solution is for ex-spouses to retain joint ownership and continue to live in the house (often, he moves into the basement and she lives upstairs) until the market improves, agreeing to postpone final division of assets until after the house is sold. Other common solutions include:

  • Renting the house to a third party until the house can sell for more than the debt
  • One ex-spouse stays in the house until the market improves
  • “Birdnesting”. The ex-spouses retain joint ownership of the home, they rent a small apartment nearby, and each one alternates living in the house with the kids and in the apartment on his/her own.
  • One ex-spouse stays in the house and pays rent to the other until the market improves
  • Structure two levels of spousal support: before and after the house sells
  • Agree to sell the home at a loss, share the loss, and move on with their lives
  • Create an analysis for a HELOC so the spouse who retains the marital home can buy out the other spouse now – and wait until the market improves to sell.
  • Short-sale, foreclosure, or bankruptcy.

Fifty-eight percent of respondents told us that the current economic climate has affected the type of assets their clients wish to receive as part of their divorce settlement (compared with 63% the year before). The most common request was for liquid assets only: their clients want cash rather than stocks, investments, real estate, or retirement plans. In other words, “Cash is King.” Other recession-related changes include:

  • For some, the house is now more desirable than retirement assets; for others, the exact opposite is true
  • Most want cash rather than property or investments
  • People are more receptive to the idea of selling the house (if possible)
  • Neither party wants the house, and retirement accounts can no longer be used as negotiation tools as many have lost more than half their value
  • Taking a much harder look at the cost basis of an asset and what the tax implications would be today if it required liquidation
  • Insurance-related products (such as annuities and permanent life insurance) are becoming more attractive
  • Higher premium on land and fixed-income investments, as opposed to “extras” such as vacation homes.
  • Some assets have been depleted completely so the settlement is no longer applicable.
  • Assets are split according to shares instead of cashing out and splitting the proceeds (cash)
  • Clients are using tax planning much more.

According to the survey, Mediation and Collaborative Divorce proved to be the most cost-effective ways for clients to process the financial aspects of their divorce in 2009-2010. Many CDFAs work in two or more models, and they were able to paint a pretty clear picture of expenses incurred by their clients in each.

Of the 77% of respondents who use the Mediation process to help clients resolve their divorce issues, 44% reported that the average divorce cost less than $2,500; 38% cost between $2,500 and $5,000; and 18% cost more than $5,000 (15% cost between $5,000 and $10,000; 2% cost between $10,000 and $15,000; and 1% cost more than $15,000).

Of the 58% of respondents who use the Collaborative process, 42% reported that the average divorce cost less than $2,500; 37% cost between $2,500 and $5,000; and 21% cost more than $5,000 (19% cost between $5,000 and $10,000, and 2% cost between $10,000 and $15,000).
Of the 60% of respondents who use the Litigation process, 21% reported that the average divorce cost less than $2,500; 35% cost between $2,500 and $5,000; and 44% cost more than $5,000 (24% cost between $5,000 and $10,000; 9% cost between $10,000 and $15,000; and 11% cost more than $15,000).

Copyright ® IDFA™ 2010

“These survey results are copyrighted and are used with permission from the Institute for Divorce Financial Analysts.