IDFA 2009 Survey: Recession and Divorce

Of the 270 CDFAs who completed the survey, 68% said they had seen clients who could not afford to get divorced because of recession-related financial problems.

•    63% said that this represents an increase over previous years

•    35% said that the number had remained constant

•    Only 2% reported a decrease in the number

When asked to assess the difference that current economic conditions have made to the number of new divorcing clients coming through their doors, 43% say that the recession has not affected the number of cases, and 19% say that the recession has increased the number of new cases they’re seeing. Of those who had seen an increase, 74% experienced an increase between 1% and 25%, and 25% experienced an increase between 26% and 50%. The most common reason cited for the increase was the recession: the extra stress of the financial downturn was the proverbial last straw for many troubled marriages. Other common responses included

•    People who are contemplating divorce are checking things out to make sure they can make it financially before they file or even see an attorney

•    They are thinking now is a great time to get out when they have to start over from scratch anyway

•    Some clients seem to be motivated to go ahead and cut their losses

•    Clients are recognizing they need help from financial experts now more than ever

•    There’s more concern over financial impact of property settlement decisions

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:

•    Clients think they can’t afford to divorce until the economy improves

•    Not enough money to hire a financial expert in addition to lawyer

•    People just can't afford to live apart – especially if the matrimonial home is “underwater”

Seventy-three 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 (a.k.a. “underwater” or “upside-down”). 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.

Sixty-three 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. 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.