2022 has not been the most stellar year for the economy and market performance. We have seen increases in interest rates and increasing prices on everything. Money issues fuel divorce and that is no exception in a down economy. The uncertainty in the current market raises a lot of questions about inflation for people who are considering divorcing. Let’s discuss how inflation impacts divorce.
Ways Inflation Impacts a Chicago Divorce
Inflation is impacting those facing divorce in Chicago. Here are some things you will want to consider when planning for a divorce during this current period of inflation.
1. Selling a House With Rising Interest Rates
It is not uncommon for people to sell their homes in a divorce and share in the proceeds, or for one party to buy the other party out. However, when we include language in a settlement regarding someone buying the other party out, they generally are given a period of time to refinance, and in the event that they cannot refinance to move the mortgage into their sole name, the house will be sold.
After the great recession, we saw periods of time for refinances from six months to two years. Generally, folks are not willing to give each other as much time now. There is too much risk to the party who is not keeping the house with having their name on the mortgage and no control over if the payments are being made on time, etc. So, generally, a refinance period these days is on a shorter leash. However, we are seeing changes in the housing market, likely to do with he rise in interest rates.
Just a year and a half ago, we saw average interest rates under 3%. Now it is not common to see 5-6%. This means that buying a new home is much more expensive than it was, and as a result, fewer people are purchasing new homes. This has caused a slowdown in the housing market. With predictions of another recession to come, there is uncertainty in the housing market as a result. So, someone who is going to try to re-finance now faces challenges in being qualified as well as the concern that if they wait too long and the housing market values decrease, they may not be able to refinance without bringing money to closing. (This depends on how much equity they have and how much their mortgage is; but, if they recently bought a home and only put 10% down, it is feasible to see a 10% drop in a short period of time).
So, what does this mean for folks who are divorcing?
For starters, their settlement agreements need to be drafted in a way that anticipates that the homes could sell for a profit or a loss, for one, in the event they are sold at a future date instead of a more current date. Additionally, if someone plans to retain a home, they need to realize that there is risk in the value decreasing with the way the markets are looking. (Of course, there is always risk in any investment, but we are seeing signs and predictions of a bit of a downturn.) These are all things to consider when determining what to do with real estate during uncertain times in a divorce. It is important that the parties consider all possible scenarios. It may be best to try and sell the house rather than a wait-and-see approach where risk is involved.
2. Spousal Support and Child Support Considerations
Inflation generally means people will spend less money. So, folks who are employed in areas that rely on sales as part of their income may see a decrease in salary if folks are no longer spending as they once were. The cost of everything goes up, and people then feel they don’t want to spend as much money as they would have when rates were lower (at least, in theory, this is what happens). So, someone who works in a sales field may see their sales decrease. That may mean performance bonuses or commissions decrease. And, that means, that when support is calculated, it is important to argue that a set amount of support is based only on salaried income, and not on projected income.
For example, some people believe that they will always receive a bonus of a certain amount each year due to prior performance history. So, they may lump that bonus income or part of that bonus income into their salary for purposes of calculating support to avoid having to do a “true up” on bonuses/commissions at the end of the year. This is dangerous when a market is largely changing.
While child support is always modifiable, people can agree that spousal support is not modifiable, for one, so it is important to pay attention to this. And, if the support is modifiable, if there is a substantial change in circumstances you can always file to modify your support – however, that process takes time. And, oftentimes, by the time people file to modify their support obligation, the change has already happened. They end up paying more than they can afford for a period of time because the court can only modify support retroactively back to the date the request was filed, and even then, the person can only file once the change occurs. So, in most cases, the person is already paying more than they “should” be because they aren’t earning as much.
Ultimately, the best way to handle this is to set support on salaried income only and pay a percentage of bonuses and commissions upon receipt, or, do an annual true-up on all income each year to pay the differential due to the other party. This will be the most accurate way to handle support and it is something that should be strongly considered during a period of inflation. (Additionally, be sure to file your motion to modify support right away if you are laid off or terminated!)
Increasing Cost of Add-On Expenses
A more minor, but worth-noting inflation-related concern is the increase in the cost of “add on” expenses. There are certain expenses that a court may order parties to contribute over and above the child support payment, such as out-of-pocket medical expenses, extra-curricular activities, child care, and mandatory school fees. With the price of everything on the rise, it is important to also be aware that these types of expenses will become more expensive as well, especially if this is something you have worked into a budget.
3. Employment Concerns
When inflation rises, oftentimes job loss will follow. Companies will see a decline in sales or profits and as a result, they will often look towards cutting their own costs in trying to protect their bottom line. That means that if you or your spouse recently changed jobs, there may be some job uncertainty. Typically when companies are faced with layoffs they will look at either their most expensive employees or the newest ones when determining who to let go. It is best to be prepared and consider the possibility that you or your spouse may have employment changes coming, given the impacts of inflation, and consider this when budgeting for a divorce.
4. Business Owner Concerns
Perhaps you or your spouse own your own business. It is possible with rising inflation that your costs have also increased, which will reduce your bottom line. This may require you to make changes to your personal budget. Business income is a large factor in determining the value of a business. In the event that the business is valued during a downtown in the economy, the “buy out” price may be lower than it normally would be in regular financial growth markets. This could benefit the business operator or owner if they intend to buy their spouse out and keep the business. The business is essentially “on sale” during a downturn in a market. So, higher inflation and lower market performance may be an optimal time for a business owner to file for divorce, depending, of course, on the nature of the business.
People who wish to end their relationships do it during good and bad economic times. The timing may never be “right” to file for divorce. If it is something you are considering, the best thing to do is reach out to an experienced divorce attorney in Chicago who can address your concerns.