A growing number of divorcing couples are being confronted with the ways in which the COVID-19 pandemic has impacted the value of their assets.
There will always be ups-and-downs in various markets that can affect the success of a business or the sale price of a house. But typical fluctuations usually won’t turn an asset into a liability. Still, there is evidence to suggest that for many small businesses in New Jersey, the coronavirus pandemic is different. There is a strong possibility it could have a significant impact on the valuation of an asset (such as a business) that you’re equitably dividing in a divorce.
NPR recently reported that at least half of people in four major U.S. cities experienced job loss, reduced wages or a cut in hours. Another survey conducted by the U.S. Chamber of Commerce found that 70 percent of small businesses owners were concerned about financial hardship due to prolonged closures. Nearly 60 percent worried about having to permanently close. Service and retail businesses were more likely than those in other industries to be hit hardest. Indoor dining, for example, was prohibited in New Jersey for a full six months, reopening again only in September – but with a 25 percent capacity limit and stringent cleaning limitations.
If you are a small business owner going through financial hardship and a divorce, valuation of your business is going to be central to discussions about equitable division.
Why Property Valuation Matters
When a couple starts divorce proceedings, it’s necessary to determine the value of the marital property (property acquired during marriage) so that it can be fairly divided. This can be done through appraisals, comparative market analyses, asset assessment and other research methods.
There are many factors that can impact the value of a property or asset. One of those is timing. For example, a business may net $500,000 in sales one year and only $350,000 the next. Conducting a longitudinal analysis going back at least several years may give us a clearer idea of what the business is actually worth.
The impact of COVID-19 may require us to look even more closely at the estimated future value of the asset. Normally, we do this with investment property or assets, which is explicitly purchased with the expectation of it growing in value. But it can go the other way as well. For instance, certain computer equipment may be worth $1,000 now, but in 5 to 10 years, it will be obsolete and worthless. The pandemic has damaged the current value of many businesses, but for some the potential future value as well.
For example, let’s say a wife opened a casual dining restaurant four years into the marriage. Business had been steady or growing in recent years – until COVID-19. Suddenly, revenue nose dives to almost zero. The wife borrows marital funds and takes out loans to keep the business afloat, but the business is floundering. There is no guarantee the business will survive the year. As our Monmouth County divorce lawyers can explain, there is a good chance valuation of that business may deem it more of a liability than asset. That’s going to have a major impact on what each party can reasonably ask for in equitable distribution proceedings to ensure the outcome is fair.
The date of asset valuation is usually the date of the complaint. In situations where assets have diminished between the date of valuation and the date of trial, the change could potentially be reflected in an alimony award. However, in cases where the change in one person’s financial situation is so significant that this wouldn’t do sufficient mutual justice, the party must be permitted to apply to the court for appropriate equitable distribution in light of the exceptional circumstances involved - as noted by the New Jersey Supreme Court in the 1977 case of Smith v. Smith.
In another case decided in 1991, the Superior Court of New Jersey ruled in Goldman v. Goldman that it would be unfair to charge a plaintiff with an asset that had value at the date of the complaint, but had no value at the time of trial. Therefore, the court decided the asset in question (a small business) would be valued as of the trial date instead of the date of complaint.
The bottom line is that the pandemic has had a profound impact on many families and small businesses. For that reason, it may be considered an exceptional circumstance in divorce asset evaluation.
If you have questions about divisions of debts and assets in a New Jersey divorce, contact the Monmouth divorce attorneys at Rozin-Golinder Law LLC by calling (732) 810-0034.