Recession Takes its Toll on Child Support

The recession has really hit home. In family courts across the country, a surge of parents stung by the economy are coming back to plead for a reduction in their child support payment obligation, and it’s affecting the courts as well as the kids.

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The courts are being flooded with modification cases. If the person responsible for paying child support loses his or her job and is financially incapable of making payments, the hardship can be devastating to all parties affected. If the court reduces the original payment amount, the burden extends to the custodial parent who relies on that money to survive and provide necessities like food, shelter and clothing. If the court doesn’t reduce the amount, the payor could end up in jail for failing to pay child support. Nobody wins. As layoffs continue to occur, more people are going to court to have their child support agreements changed. Pressure is mounting in the courts due to the increased volume and complexity of cases in which people attempt to modify and renegotiate their court-ordered support payments.

What are the Courts to do?

Presented with evidence of depleted incomes, layoffs, home foreclosures and mounting expenses, a judge often has no other choice but to grant a decreased adjustment in child support even though the custodial parent is struggling to support the kids. It is difficult, but fairness somehow has to be determined.

How is Support Calculated?

The guidelines for child support vary from state-to-state. They generally take into account the income of both parents, the number of children, standard of living and considerations for a particular child’s special needs.

How Does a Modification Work?

It takes a new court order to alter the existing order. In the event of a layoff or a reduction in pay, support may be reduced but only if a motion is filed for review and the court approves the modification. It’s important to note that the court order for child support will continue to be enforced even after a job loss. It doesn’t automatically end when the source of income ends. The courts typically order the obligor to pay a portion of their unemployment benefits in child support. If their unemployment runs out and they have no income, the amount can be reduced or even temporarily suspended. The modification process begins with consulting with an experienced family law attorney and contacting the child support division. It is important to remember that the modification review process can take some time.

What’s Ahead?

Along with the hardship facing parents struggling to meet child support obligations, the courts are also struggling to overcome the burden of burgeoning caseloads. The ability to remain flexible and open to creative solutions is crucial until the economy stabilizes or at least allows for breathing room.

The Economic Crisis: Foreclosure in Divorce

Burns Law Office; Burnsville Family Law Attorney

The skyrocketing foreclosure rate is hitting divorcing couples hard. For the average divorcing couple the expense of maintaining two households, where there had been only one, is a financial challenge even in good times. Throw in a job loss, ballooning mortgage payments and overextended credit obligations, and the odds of facing a mortgage default goes through the roof.

Negative-Equity Mortgages

Because of expensive mortgages and falling home values, many homeowners now have negative equity in their homes, meaning that the value of the homes have fallen below the mortgage balances. Consumers with negative-equity mortgages are sometimes referred to as being underwater or upside down. This becomes problematic if the homeowners have to sell in a divorce; if such a home is sold at market rate, the proceeds would no longer be enough to pay off the mortgage. Even if all proceeds were applied to the mortgage, the mortgagor would still be liable for the balance of the loan.

Short Sales

One viable alternative to foreclosure for a divorcing couple, that needs to sell the family home, may be the short sale. In a short sale, the bank agrees to allow the home to be sold at market rate and accept the proceeds in satisfaction of the mortgage, even though it is less than what is owed. The difference between the sales price and the mortgage liability is essentially forgiven debt.

This can be a win-win for both the lender and the homeowners: the bank does not have to go through an expensive foreclosure or assume ownership, and sometimes assume the responsibility for upkeep and resale of the home, and the divorcing couple can walk away free of the house and the mortgage liability, and without the more serious blow to their credit a foreclosure can deliver. Although, there may be negative credit implications that stem from a short sale that a homeowner should be aware of.

Of course, the particular lender must be open to a short sale. The logistics, however, can be difficult during divorce. Short-sale negotiations are notoriously arduous and can take months when the divorcing spouses would just as soon be on with their new lives. Sometimes the lender ultimately will not agree to accept less than the mortgage if it feels the borrowers could pay the difference from other resources.

Tax Ramifications

The part of the mortgage debt forgiven in a short sale has traditionally been viewed by the government as taxable income. However, in most situations, the Mortgage Debt Relief Act of 2007 forgives this debt-forgiveness tax on the federal level for mortgage restructuring or discharge on a principal residence through 2012. However, a divorcing couple will have to negotiate responsibility for any state debt-cancellation taxes.

Other Issues

Facing possible foreclosure on the marital home during divorce can raise challenging logistical and legal questions:

• Does it make sense for one spouse to try to keep the home?
• If the lender will refinance or renegotiate terms to lower the monthly mortgage payment, will it approve the revised mortgage considering the income of only one spouse, or will both be required to sign, leaving the couple tied legally even beyond the divorce?
• Should the couple negotiate in their divorce settlement agreement who will be liable for any future taxes if the marital home is sold in a short sale after the divorce?
• Might bankruptcy be a better alternative than a short sale or foreclosure?

Anyone trying to negotiate a divorce complicated by a possible mortgage default should get competent professional advice. The guidance of an experienced, skilled family law attorney, and of tax and financial planners can be invaluable. Every potential foreclosure in a divorce is a unique intersection of applicable state and federal law, the terms of the mortgage contract, the position of the lender and the characteristics of the divorcing spouses.