Divorce, Economics, and Inflation

Posted on Aug 10, 2022 by Katie Carter

When I was a brand new baby lawyer, fresh out of law school, it was a few years after the 2008 real estate crash. At that time, I remember seeing a lot of people – yes, even several years later – who came in with tons of debt and houses that were underwater.

At the time, the pressure of the collapse was starting to lessen. For us, as a divorce firm, we saw more and more people coming in for divorces. In the couple of years prior to that, I was told, the divorce rates were much lower; not because people didn’t want divorces, but they couldn’t afford it.

In those cases, people tended to stay married under the same roof, just waiting. Then, when their economic situation improved to where they felt they could ‘afford’ it, they scheduled a consultation with a lawyer.

I’m seeing some parallels to today – not, though, that I’ve seen the number of people coming in the doors slow down. Mostly, I’m wondering if that’s where we’re heading, not that it’s a reflection of what I actually see happening now.

Some economists say a recession is coming; others say that, while difficult, it’s technically still avoidable. I’m not an economist. But I do see the impact that inflation is having on the cost of every day goods and services, and how that changes the financial situation for normal families just trying to live within their means.

In a divorce context, the wider economic security of the country makes a difference – and not just in terms of whether you have student loans that may or may not be forgiven, or whether there’ll be some kind of economic stimulus check to fight over.

Specifically, I worry about the real estate market, the decreasing value of retirement accounts, and a partner’s diminished ability to pay spousal support.

The Real Estate Market

Nationwide, there’s a shortage of available houses – especially at lower price points – compared to the number of would-be homebuyers. For a while, there was tons of talk of offers being made above asking, inspections being waived, no contingencies, bidding wars, and so on, but, as the Fed has raised interest rates, demand has cooled a bit.

Compared to this same time period last year, interest rates have gone up significantly, so the average homebuyer can’t buy nearly as much house with the same amount of money.

So, while you live under the same roof in a home that you bought before the boom, you’re good – but once you start thinking about either selling it (with an eye to buy some other place for your post-divorce life) or otherwise refinancing the current home into your sole name and buying out your partner’s interest, well, things look different.

Even if you keep your house, a refinance will be expensive because interest rates are high. That’s always a concern in divorce; for happily married couples, a refinance can take place, if at all, when the interest rates hit optimum levels. In a divorce situation, there’s rarely the time to be quite so picky, since most separation agreements are going to dictate that the refinance needs to happen within a relatively short time frame after signing the agreement (and, similarly, a judge won’t give much leeway, either – certainly not enough to allow interest rates to really decline).

At any rate, we’re only hearing about how interest rates are going to climb in the near future, so it’s not like having a little bit of extra time will mean that the situation has had a chance to improve.

The rental market isn’t much better, either. Rents have been climbing steadily so, although you wouldn’t have to worry about rising interest rates, there’s still the fact that it’s considerably less affordable now than it was even just a few years ago.

Dividing Retirement Accounts

I’m just going to say it: it sucks to divide accounts that are already worth significantly less than they were just a year or so ago.

Part of what helps retirement accounts build money is having a fairly large nest egg in the account, which helps you generate interest. I remember with my own account, when I first started, it seemed like it took ages to reach $10,000, $25,000, $50,000 – but then, as you have more and more in the account, it starts gaining more steam, and you see those $10,000 and $25,000 increases happen much more quickly.

To take accounts that have already dropped in value, and then divide them into two separate accounts using a QDRO or other divorce-related division, well, it’s a disheartening prospect. If you’re working with a financial planner, as you probably should be, you’ll likely see the pinch in any projections. Of course, we’re all feeling the economic shifts here; it’s not like yours are the only accounts that are falling in terms of value. But it makes divorce harder to contemplate, and the cost of shifting to separate accounts (rather than keeping it together in one account) more significant.

Spousal Support

One of the first things we look at when we talk about spousal support is need and ability to pay. Need means that one of you earns significantly less than the other; ability to pay means that the other party has extra cash on hand.

We look at the way resources are allocated between the parties to determine whether spousal support will be awarded at all, and, if so, how much. So, the impact that inflation is having on your budget (and his) will be something that, whether at pendente lite or as a final determination in your divorce, is relevant.

Will it impact the amount you receive? It’s hard to say – but it stands to reason that the increased costs associated with, well, LIFE will be something that comes into play when the judge is awarding spousal support (or you’re negotiating).

It’s a tough time. Does it mean you shouldn’t get divorced? Well, that’s not for me to say. You know best whether your marriage is worth saving. And you have no control over the economy or rising inflation or any of those other economic issues, so ultimately whether you decide to move forward, reconcile, wait, or something else, your decision is both good and valid.

For more information or to schedule a consultation, give our office a call at 757-425-5200. We can help point you in the right direction, even in these crazy times we’re living in.