Divorce Mediation Blog

Divorce Agreements: Where Have All the COLA’s Gone? Part 3 Four Reasons Why COLA’s May Hurt

Wednesday, April 03, 2013

In previous entries, we recalled the days when cost of living adjustments (COLA) provisions were a common feature of Massachusetts alimony and child support settlements, and their virtual disappearance. Then, we focused on 7 reasons why COLA’s may be beneficial to divorcing parties.

Here, we look at 4 risks of COLA’s :

  1. COLA’s are very technical. The structure of COLA’s vary quite a bit, from “simple” to quite complex. Complexity results from the negotiator and drafter’s efforts to cut risks, to accommodate competing interests and to effectuate compromise. A “blown” COLA can result in betraying the parties’ intentions, increasing tensions and litigation costs in efforts to rectify poor or problematic drafting.
  2. The unknown is unknowable. In a relatively benign inflation environment, the sting of a periodic automatic increase may seem manageable, especially with a payor’s career ascending. But, as discussed in our last 2 blog entries, the cost of living is subject to unexpected changes. An inflation spike may be accompanied by wage hikes, or it may reverse the arc of a rising career. The payor’s perceived need for insulation from upward support modification can become a resented memory; and the recipient’s sense of protection from rising costs may ring hollow, when trumped by the other party’s poor work fortunes.
  3. The unknowable may stay that way. Mostly, the economic lives of divorced parties become opaque to each other. Certainly, houses, cars and vacations with kids give clues to changes in the other’s economic life. But, appearances can be deceiving. The flip side of the support modification disincentives noted in our last entry, is that one party may never know that he/she might be eligible for a great increase or decrease in support, for reasons that would become known only through the information exchanges that are mandatory in modification cases. The well-functioning COLA may mask other changes of circumstances that one party might dearly like to know, suggesting that a substantial shift of equities between the parties has rendered the previous deal unfair.
  4. Security can feel insecure. Being free(er) of inflation pressures (recipient), or insulated from unwanted upward modifications (payor), can make both parties feel freer to move forward with their lives, and less burdened by worry about future litigation. Yet, the parties can also come to feel victimized by their own success. A recipient who feels protected by the COLA may later encounter a judge who is less likely than otherwise to increase support. At the same time, a payor, especially one who has a COLA that is sensitive to the comparison of his/her income changes relative to inflation, may find a judge who is less apt to reduce support based in changes in his/her own purchasing power, when this issue has already been addressed by the parties’ agreement. Both parties may have compromised their access to the safety net of court-ordered modification, which for all its costs, inefficiencies and risks, may feel like a loss.

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