November 9, 2022
Few life events are more emotionally and financially taxing than divorce. Inflation is making it even worse.
Increases in alimony and child-support payments tend to be tied to the consumer-price index, a measure of what consumers pay for goods and services that has grown at the fastest rate in four decades. Disputes over who gets to keep the house became more contentious when mortgage rates doubled this year as a result of the Federal Reserve’s efforts to stamp out inflation, divorce lawyers said. And the market downturn, which followed the Fed’s rate increases, left already stressed couples fighting over shrinking 401(k)s and other investments.
“People are angry at the economy and angry at their spouses, and they’re acting out,” said Stacy Phillips, a divorce lawyer in Los Angeles.
Divorces that previously would settle after one or two mediation sessions now often require six sessions to resolve, said Ms. Phillips, who has more than 37 years of experience practicing family law.
Higher legal bills add to the tension. The price of legal services rose 7.4% in September from a year earlier, according to the Labor Department. The cost of divorce varies widely depending on the complexity of the divorce and how many issues are contested. On average, divorcing spouses in the U.S. each pay $11,300 in attorneys’ fees, according to a 2019 survey by Nolo, a legal-information publisher.
Many divorce cases that were put on hold during the pandemic are now proceeding and are even more heated because of increased financial stress, said Jacqueline Harounian, a divorce lawyer in Carle Place, N.Y. Divorce rates fell almost 9% in 2021 compared with 2019, according to the National Center for Family and Marriage Research at Bowling Green State University.
There are steps couples who are splitting up can take to minimize hostility and manage costs right now, lawyers said. They recommend being open to creative solutions and, in some cases, even continuing to live together for a while.
Fights over the house heat up
Deciding who keeps the house has always been a big point of contention in divorces. There is more on the line financially these days.
Higher mortgage rates change the way people think about their present and future homes, said Heidi Tallentire, a divorce lawyer who practices in New York and Connecticut.
If one spouse wants to buy out the other’s share in a home, that spouse often needs to refinance the mortgage, she said.
Refinancing is much costlier than it was a year ago, with mortgage rates now hovering around 7%. A home with an adjustable-rate mortgage due to reset soon may now be less attractive to keep.
Ms. Tallentire has been involved in several situations where one spouse is slowing down the divorce process in the hopes that mortgage rates will come back down. This isn’t always possible if the spouse who is being bought out of the house doesn’t want to continue to be obligated (on paper) for a mortgage on a home he or she no longer owns.
The alternative is to sell the home, but with home price growth slowing, some clients are reluctant to sell if they can’t get the price their neighbor scored earlier this year, she said. High rents and low housing inventory add to the stress of the spouse who is moving out.
Valuing assets is complicated in a bear market
Rising interest rates have contributed to market volatility, making it harder than ever to equitably divide investment accounts, said Steph Wagner, national director of women and wealth at Northern Trust Wealth Management. Divorcing spouses might lose out if they elect to take one account over another without fully understanding the holdings, including how much they may eventually owe in taxes, she said.
Margaret Donohoe, a lawyer in New York, worked with a woman who agreed to take a $2 million securities portfolio instead of the family home. As the stock market dropped, she began to regret her decision to take the portfolio that was now worth about $1.8 million, said Ms. Donohoe.
The wife wanted to be made whole with additional assets. The husband argued that if the wife hadn’t slowed down the divorce process, the market drop wouldn’t have been his problem, said Ms. Donohoe.
Each of the spouses felt they were getting a raw deal, so they returned to the negotiating table and decided to sell the house, split the proceeds and divide the securities in kind, so any market risk was taken equally between them, said Ms. Donohoe.
Child support and alimony may keep up with inflation, but budgets sometimes can’t
Higher prices have made child and spousal support disagreements increasingly difficult to resolve, lawyers say.
Child and spousal support orders can be subject to a cost of living adjustment (COLA), which is tied to the consumer-price index, said Christian Pickney, a divorce lawyer in Garden City, N.Y.
With inflation running at a four-decade high, these COLA adjustments have stretched some family budgets, he said. The impact of the higher cost of living hasn’t fully made its way into the courtroom yet, he said.
Mr. Pickney has a client who is now paying $6,000 a month in child support who may have to pay $6,700 a month in 2023, despite not having any increase in his income.
“Combined with increased living expenses, this could impose tremendous hardship,” he said.
Some couples find it cheaper to live together after the divorce
Staying married is usually better for your finances (though not always your mental and emotional health), lawyers and financial planners say.
Many couples can’t afford to live apart right away, said Ms. Harounian, the divorce lawyer in Carle Place, N.Y. Recently, she is seeing more couples agree to live together post-divorce (upstairs, downstairs arrangements, for instance) than she did prepandemic.
Ms. Harounian frequently recommends that couples sign a postnuptial agreement or legal separation agreement instead of divorcing, which can enable them to stay on a family health insurance plan and file a joint tax return.
Nesting, in which the divorcing parents rotate in and out of the family home to care for the children who reside there continuously, has become more popular as people face higher housing costs, said Lisa Zeiderman, a divorce lawyer in New York. When a parent is “off duty” that person stays in an apartment nearby that they also share.
The arrangement doesn’t always end money fights and new ones may arise, lawyers said.
“With grocery prices escalating, they end up arguing about leaving the refrigerator empty for the next nesting parent,” said Ms. Zeiderman.
This article was originally published in The Wall Street Journal on November 9, 2022, and written by Veronica Dagher
- https://www.wsj.com/articles/divorce-expensive-inflation-legalbills-alimony-11667966563?st=ced6ufz366b05y3&reflink=desktopwebshare_permalink
- Image courtesy of iStock
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