Tuesday, 4 November 2008

Wall Street's effect on Main St Australia: part 1

I am probably showing my age, but I recall well the effects of the 1987 stock market crash- when at first it was seen as a long overdue pricking of the bubble that would have little effect on the real economy. The relaity, of course, was that it did have a major effect on the real economy, causing real strife.

Now that we are in the midst of a global financial crisis, it is clear that the impact on the real economy is much quicker than last time around: there is a massive loss of confidence, with resultant difficulties for asset values and for those wanting finance. Another feature that makes this drama different from the last is that many more Australians, through compulsory superannuation, are exposed to the vagaries of the stock market.

There are real issues for family lawyers and their clients about how to respond.

Just to reflect about how it might impact, let's go back to some basics about property settlement:
  • there has to be property available to divide
  • the first step in any property division is always to identify that property and value it
  • when a deal is reached, either by order or agreement there is a division of that property
  • that property is often either sold or refinanced. It is rare to have a clean division when no one has to sell or refinance.
  • super may have to be split.

So there are five key issues:

  1. how much is each item worth? Given that the value for any negotiation is that value at trial, then it is often wise to keep getting updated values. No one wants to do this because it can be time consuming, expensive and can slow the litigation to a halt. Not to do so might mean that a party ends up with an unfair result- the property is valued at what is now an artificially high result.
  2. if the value has been set because the matter has gone to trial, will the court reconsider values after trial but before judgment has issued. On precedent, the chances of getting the values changed after trial are unlikely, giving yet another reason to settle before trial. Whilst a bitter party might be happy that their ex is to get valueless property, what if they get stuck with it?
  3. can super be divided? This might sound like a basic question, but I have heard of super trustees who have been reluctant or opposed to splitting because of the massive change in asset values.
  4. can a party get finance? If they can't what then? Are they in default of their order/binding financial agreement? What do they do? What does their ex do?
  5. what immediate crisis is there? How can it be responded to? Will the usual remedy of a refinancing or quick sale to tide things over fix the problem? What if finance is simply not available, or property simply cannot be sold even at fire sale prices?

Anyone going through a property settlement is now faced, unfortunately, with thinking these things through. Some of the old questions pop up again, but now more urgently:

  1. Should I take a smaller share now for certainty, rather than take the punt for possibly a higher share later?
  2. what mix of property should I take now? In particular should I be taking super? Should I be offloading my super on to my ex?

What is clear is that much more thought needs to be given to these issues and clients should, as usual, get good financial advice from a financial planner, but particularly ask these hard critical questions of themselves and their advisors.

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