Mediating in Difficult Economic Times
By Miriam G. Kosowsky, Esq.
I saw terror in his eyes, as he turned to his wife and cried, “So you want me to live in my car?” Increasingly, divorce mediators are encountering couples who, because of the current financial crisis, are reeling from; job loss, houses that are under water or rent that cannot be paid, and large credit card debt. The arguments divorcing couples are frequently having are not about who gets the vacation house, but rather arguments that come from a primal fear that they will be left with no money to live. In other words, they are worried about their very survival.
In an economic downturn, people who are divorcing should think about mediating their disputes instead of turning to litigation. In mediation, an impartial mediator meets with both parties in a supportive environment and empowers the parties to work together towards a mutually beneficial solution. The mediator provides information so that the parties can discuss their disputes based on facts and not incorrect assumptions. The mediator helps guide the parties to reach an agreement that will meet their specific needs. The mediator is not a judge, and does not decide the terms of an agreement; the parties are the ones who have the ultimate decision about the terms. While mediations in an economic downturn are more complicated than in better economic times, mediation makes even more sense now because it is much less expensive than litigation and because mediation gives the parties the flexibility to plan for different future income scenarios, such as the loss of a job, while giving the parties the emotional support to get through this difficult and uncertain time.
In litigation, there is often a winner and a loser, and a judge decides who gets what. As a result, many divorced people feel that they got “screwed” in court. However, in mediation, it is the parties who decide how to allot their assets and liabilities. A good mediator will elicit the issues most important for each person, and the assets each feels strongly about retaining. If the parties have children, they can decide how they want to parent their children after the divorce and a mediator will elicit what aspects of a parenting plan are important to each person. Mediation is not argument free because each party wants to end up with the best deal for him or herself. For example, one parent might feel strongly about spending New Years Eve with the children while the other parent might feel strongly about spending Labor Day with them. In mediation, the parties have the flexibility to trade one factor for another, for example, one person might keep the expensive Italian painting in exchange for receiving less alimony. With this approach, although no one gets everything he or she wants, each party gets at least some things that are very important so that each person knows that the settlement is fair.
Mediation is Less Expensive Than Litigation
In difficult economic times, people getting a divorce do not want to spend their limited funds on huge legal bills. Yet in divorce litigation, each spouse almost always retains an attorney, and almost all divorce attorneys require money up front, called a retainer, in order to take on a case. The retainers typically range from $3,000- $50,000 in large metropolitan areas. When money is tight, it is difficult for people to tie up that much money. Some mediators do not require a retainer but instead only charge clients for work as it is being done. If a mediator charges a retainer, the amount will typically be much less than a divorce attorney’s retainer amount. Moreover, because both parties meet with one mediator, mediation is significantly less expensive than litigation because the parties have to pay only one person instead of two. Additionally, since mediation is less formal than litigation, parties do not have to spend money on subpoenas, interrogatories, depositions and other costly legal procedures.
During mediation, the focus is on working together to come up with an agreement that is fair to each person. Because of this cooperative approach, mediation couples do not get mired in the brutal and costly legal battles that are all too common when people litigate. Even parties who may not think that they can work together, find that it is in their financial best interest to do so because they can increase the total amount of assets that each can retain. For example, a higher earning spouse will receive a greater tax benefit from claiming a child as a dependent than a lower paying spouse. Instead of arguing over who can claim the dependency exemption and paying attorneys to duke it out, the parties can agree that the higher earner will claim the deduction and divide the tax savings with the other spouse. A mediator can help the parties focus on the best tax savings and discuss with the parties how they will share those savings. Similarly, if the parties own a business, it might be more profitable for each of them to a find a solution that will allow the business to continue instead of being forced to liquidate it. Through the process of mediation, the parties can reach better financial decisions than through litigation.
Negotiations Over Losses are More Difficult than Negotiations Over Profits
Litigation is extremely difficult. It is emotionally devastating and very expensive.
Divorce negotiations, whether in litigation or mediation, are seldom easy, and in an economic downturn, negotiations become more difficult because people feel more uncomfortable negotiating over losses than over profits. This is because “negative events affect us much more strongly than positive events.” For example, losing a job is far more emotionally packed than finding a new job. Just think about how uncomfortable many people feel telling their friends that they have been laid off. Negotiations over costs and losses therefore tend to be more competitive than negotiations over benefits and assets.
Despite their intense negotiations, parties often reach less efficient agreements when discussing losses because, as studies show, people will pay more to avoid a loss than to get an equivalent benefit. A good mediator will be aware of these phenomena and can help the parties reach better decisions by giving them information, helping them to problem solve, and by creating a safe and supportive environment where the couple can talk. Although a mediator cannot transform the financial landscape, he or she can explore the parties’ choices and the advantages and disadvantages of each. A mediator will acknowledge and understand the fears and interests of each party and though each person will focus on his or her own survival, the mediator can enable the parties to work together to find realistic solutions to their problems. By helping the parties problem solve together, a mediator can lower each party’s anxiety level and help empower the parties to come up with the best solution.
Housing issues become much more complicated in difficult economic times. A couple that is barely making ends meet running one household will find that adding new expenses for a second household will strain its budget even further. The parties may be forced to take on more debt or to drastically cut their expenses.
Couples who use mediation, try to keep as much stability in their children’s lives as possible, which often means that they opt to keep their kids in the family home. Studies confirm that children of divorce do better if they do not have to move out of their home immediately upon divorce. However, if a couple litigates, a judge will often force the immediate sale of the home, even if this is not the ideal situation for the children. In mediation, couples can be creative. For example, they can agree to keep the home until their youngest child graduates from high school. If the parents can afford to keep the family home, one spouse typically stays in the house with the kids and the other spouse moves out.
The spouse who stays in the home will either buy-out the other’s interest in the home, or share the proceeds with the spouse who moved out when the house is sold in the future. Even if the parties are fortunate to be able to afford to keep the family home, there can be drawbacks to this decision because of the poor economy. The spouse who does not want the divorce will resent having to lower his or her standard of living due to the added expense of sustaining two homes, especially if the family home has a costly mortgage. On the one hand, the spouse who must find different living arrangements may be angry and hurt that he or she has been forced out of a beautiful home and can now only afford a small apartment. On the other hand, the person staying in the home might become house poor because the expenses of running that home can eat up almost all of the disposable income.
Parents may realize that due to this economic downturn, they cannot afford to keep the family home. Yet selling the home becomes more complicated because of the bad economy. In today’s market, realtors acknowledge that it is difficult to determine the fair market value of houses in many areas or when a house will actually sell. Parties who need their home sold immediately must deal with the uncertainty that their home might not sell for months and that when it does, it may sell for well below the asking price and below what it would ordinarily be worth in more normal times. As a result, the house might sell at a loss because the mortgage on the house may exceed its present day sale price. Whereas in good times, a divorcing couple can use the proceeds of the sale to buy two residences, now many couples find that after the sale, they do not have sufficient proceeds and may even have a loss. A mediator can help the parties discuss the advantages and disadvantages of retaining or selling the family home so that whatever decision the parties eventually make, will be an informed one. Most important, a decision to sell the home will be a joint decision and not one imposed upon them by a court.
Every state is required to establish Child Support Guidelines which determine the amount of child support that the non-custodial parent should pay. The biggest factor that the Child Support Guidelines takes into consideration is the income of both parents. In a healthy economy, one or more parents are working. As a result, filling out the Child Support Guidelines worksheet is pretty straightforward. Also, the income that a parent has earned in the past is a strong indicator of at least the minimum amount that the parent will earn in the future. Nowadays, many people’s economic future is uncertain which makes applying the Child Support Guidelines more complicated. If a client has lost his or her job, it is difficult to run the Child Support Guidelines because the availability or amount of unemployment benefits may be uncertain, as is the possibility of future employment. Additionally, if someone is currently unemployed, putting a zero income amount in the Child Support Guidelines for someone who used to earn a six figure salary, may result in an economic hardship for the children and other spouse.
A mediator can deal with the uncertainty and fairness issue by having the couple imagine different future income scenarios and discuss how they want to handle each one. A mediator can calculate for the parties how child support payments will change based upon the possible future incomes of each of the parties. With this information, a mediator can include in the divorce settlement a plan for child support that changes based on how much each spouse earns. As a result, the parties, while not knowing how much income each spouse may earn in the future, will at least understand the calculations. Additionally, having a plan for a worst case scenario, such as a long period of unemployment, will help ease the anxiety that comes from the nagging question, “what if?”
Many parents disagree about the type of school for their kids. One parent might think that a state college is the best choice because it is inexpensive and the student will not have to carry much debt. Often a parent who went to a state school will insist that state schools give as good an education as private schools. The other parent might feel that a private college will result in a better job with a higher salary. Often a parent who went to a private school will want his or her child to go to their alma mater, or a similarly prestigious school. When money is scarce and education funds must come out of limited financial resources, the arguments over education can become more intense. Additionally, since many recent graduates, even from the best schools, are unable to find jobs, it is no longer clear whether graduates will be able to pay off their educational debts in a timely manner. A mediator can help the parties discuss their realistic choices so that the discussion can remain focused on problem solving.
Many marriages begin with both spouses working. However, when children are born, one parent, usually the mother, may opt to become a stay at home parent or to work part time. The financial consequences of this choice are immense. The business world does not appreciate the organizational, multi-tasking, counseling and other skills that a stay at home parent develops. The longer the person has been out of work, and the older the person is, the harder it becomes to find a job because the person is perceived as not having current skills and the ability to do the job. People who return to work after an absence of several years, will find that if they are offered a job, it is usually at a fraction of what they had earned before and for a job beneath their skill level. Furthermore, the income disparity continues even if they work full time. A person who has worked part time and is now resuming full time work, will rarely earn as much as someone who has always worked full time. People who never worked outside the home will have an even harder time finding a job. As a result of these economic realities and after a long term marriage, it is common for the higher earning spouse to pay alimony to the lower earning, or non-earning, spouse. In difficult economic times, especially if the traditional high earner has lost his or her job, there might not be enough funds to pay sufficient support for the other spouse to live. The argument over alimony will become more contentious when each spouse is concerned about having enough money to pay the bills. A mediator can help the parties discuss their alternatives and try to help them brainstorm how to ensure that each person is treated fairly.
During a poor economy, uncertainty and stress increase for a divorcing couple. Negotiations become tougher because the parties are arguing over limited resources and often over who will bear losses. Issues like whether to keep the family home, what type of education children will receive, and how much support children the non earning spouse will receive, become more complicated because finances are limited. If the parties litigate their divorce, they will face high costs and brutally contentious disputes. Mediation, while not solving the parties’ financial circumstances, is an excellent option because it is much less expensive than litigation and is focused toward joint problem solving which is more efficient than the me- against- you approach. Mediation provides a safe environment for the parties to explore each option and affords the flexibility to construct the plan that suits their individual needs and concerns. A mediator’s role is even more crucial in these difficult economic times to; help ease anxiety, provide information and help the parties reach the best possible realistic solutions.
“Negotiating in an Economic Downturn”, Negotiation
, Program on Negotiation at Harvard Law School, Vol. 11, Num. 11, Nov. 2008, p.2, referencing Harris Sondak of the University of Utah and Adam D. Galinsky of Northwestern University. .
Sondak, H., Neale, M.A., & Pinkley, R. (1995) The negotiated allocation of benefits and burdens: The impact of outcome valence, contribution, and relationship. Organizational Behavior and Human Decision Processes,64, 249-260. Okhuysen, Gerardo A., Galinsky, Adam D. & Uptigrove, Tamara A. (2003) Saving the worst for last: The effect of time horizon on the efficiency of negotiating benefits and burdens. Organizational Behavior and Human Decision Processes,91, 269-270.
A small percentage of parents keep their children in the family home continuously and it is the parents who alternate between being in the home with the kids and spending time in a different residence. This is called “nesting”.
Greenhouse, Steven. “Recession Drives Women Back to Work Force”, New York Times, Sep. 19, 2009 B1, B6. (“Studies have found that for every two years a woman is out of the labor force, her earnings fall by 10 percent, a penalty that lasts throughout her career.”)