The Domino Effect of The Current Economic Crisis

The deepening recession, increased unemployment, and a stalled housing market have negatively impacted most of our clients’ financial situations. Many clients’ homes are underwater because of declining values. Other divorcing couples who are fortunate enough to have equity in their most significant marital asset, their home, can not sell their house. Combine that with the plummeting values of retirement accounts, and we are looking at marital asset balance sheets that are nothing less than bleak.

Although, historically, divorce rates tend to rise during a bad economy, divorce practitioners nationwide have noticed a change in their practices. Experts attribute the decline in divorce filings to the severity of the economic downturn. Typically, a recession results in decreased divorce rates for couples with limited financial resources. The prospect of incurring expenses for two households seems overwhelming for those with limited resources. On the other hand, high net-worth clients may seek to take advantage of the diminished value of their homes, stock and investment portfolios, and businesses to decrease their overall financial liability to their soon-to-be ex-spouse.

When the marital residence or small business is the most significant marital asset, the party who is able to retain the house or business may reap a significant benefit down the road, rather than the one who is compensated by cash or other assets, because the value of the house or business is likely to increase once the economy recovers.

The credit crisis has impacted us, as practitioners, as well. How many times have you heard from a client that their credit card is maxed out and he/she can not replenish their retainer? Discovery has been completed but there is no more money to fund the litigation. Where does that leave us?

Instead of thinking of ways to get out of the case, perhaps we should begin to think of alternative ways to resolve the case in a more cost-effective manner. We are all familiar with mediation and late case evaluation. Arbitration is another alternative when impasse has positioned the parties and created a standstill. A three person arbitration panel, comprised of a family law expert, a financial expert and a mental health professional, may provide an insightful resolution that is far more productive than going to court. Bringing additional professionals into the picture may bring difficult issues into focus.

If the main problems are financial in nature, involving marital asset division or support alternatives, introducing a financial neutral to work with the parties may move things in the right direction. One thing many of us have not considered is the value that a financial neutral would contribute to helping the case settle in mediation. The presence of the financial expert at the mediation, working in conjunction with the mediator, would provide answers to many of the financial issues that impede the settlement process. Issues such as the tax savings associated with different support options, the variations in pension values caused by using different interest rate assumptions, and the after tax versus before tax values of various assets could be resolved right on the spot. When the primary sticking points center on custody issues, the assistance of a parent coordinator or child specialist could prove invaluable.

Today’s economy requires us, as legal professionals, to assemble a team that will serve our clients in a cost-effective manner. Although we all know that some cases are destined to go to litigation, we should attempt to utilize alternative methods of resolution prior to taking this final leap. Mediation, arbitration and a form of the collaborative law model are just a few possibilities. We are fortunate to live in a community replete with knowledgeable and experienced experts who can provide our clients with wonderful resources. It is up to us to inform our clients of the availability of those options.

Sue K. Varon, Esq. and Martin S. Varon, CPA, CVA, JD

svaron@armvaluations.com