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Episode 49 Transcript: Handling a Spending Deficit in Divorce

One of the things that a lot of families face as they’re going through the divorce process is that they come to realize, either for the first time or to a greater extent than they had appreciated before, that they are as a family, financially, that they’re running a deficit, meaning that the income that they have after taxes have been paid, their take home income is less than their total expenses as a family. 

Obviously, when you are, before a divorce, when you’re just a single family unit, you’re one financial unit, your financial fates are aligned, and running a deficit is certainly a problem and, generally speaking, not one that could go on forever, but you and your spouse are at least aligned insofar as the fact that you’re running a deficit and maybe, say, pulling from assets or, say, accumulating debt. It impacts you both in the same way because you’re a financial unit. 

But once you separate your households and your financial futures, it adds a complication to figuring out how you’re going to resolve the fact that you’re running a deficit financially because, all of a sudden, your interests are not so aligned financially, and it is not uncommon that each of you may feel like the entire burden of the deficit you’re running can and should fall on the shoulders of the other person, either in that they need to generate more income or they need to reduce their expenses in an amount equal to the amount of the deficit. 

But essentially, you are now in different camps and you have sort of a new challenge to contend with in a divorce process, which is how to share the burden of running a family deficit, how to share that burden in a fair way.

As I was saying, the sort of temporary measures that most families take when they’re running a deficit are either one or two of two things. 

One, you can use your access to assets, to capital, to deplete those assets to cover the deficit. Let’s say you’re running a deficit of $2000 a month or roughly $25,000 a year short. You can draw down on assets on bank accounts, investment accounts, hopefully not retirement, but sometimes people do. And you can cover the shortfall by pulling from your assets. 

That’s a short to mid-term solution, not a long-term solution, because ultimately if you do that forever, the asset will deplete to zero and you won’t be able to pull from it anymore. 

The other solution, which can be employed at the same time or in lieu of drawing down on assets, is to accumulate debt. Obviously, there are different types of debt. You can accumulate credit card debt. You can increase your debt on the marital home, for instance, by taking out a home equity line of credit. You can have a personal loan from a family member or a friend. 

But in essence, these are also a short- or a mid-term way of addressing the fact that your family unit financially is not running in the black. You’re in the red, and you’re figuring out a short or mid-term way to resolve that. 

Long term, there really unfortunately is no magic solution to addressing the fact that your family is running a deficit other than either increasing income and/or decreasing expenses. Those are really the only ways to stop running a deficit. 

And when you’re going through the divorce process, our goal when you are running a deficit is… Well, our long-term goal would be to have you not run a deficit anymore. But that may not happen immediately, and so what our goal in the divorce process is more focused on is helping you fairly distribute the responsibility, the burden of running the deficit that you’re running. 

In my example before, if your family as a single family unit has been running a deficit of about $25,000 a year and drawing down on your bank accounts in the amount of $25,000 a year, when you separate your finances, how are you going to share responsibility for that deficit? How should it fairly be shared between you? For some people, the answer may be very simple. “Well, obviously, we’ll equally share that deficit.” Each person can have a deficit of $12,500 a year that they are responsible for figuring out. Either they can make more money and/or they can decrease discretionary expenses or they can take out debt or they can deplete their own assets. It’s up to them. 

However, sometimes 50/50 may not be the most fair way to share the particular deficit in your situation, and that can turn on a variety of factors, including the different spouses’ capacity to earn income now and into the future, their access to marital assets, their access to non-marital assets. Think about separate assets that you may have had before the marriage or that you may have inherited during the marriage or, for instance, you may have access to assets through your family, through gifts from your family. That could be another component that is taken into consideration when you look at what is a fair way for each of us to share to shoulder the burden of this deficit that we’re running as a family. 

That’s just to briefly touch on the topic of running a deficit in a divorce process. And I guess the thing I most want to convey most about it is that, of course, financially, being in the red is stressful in and of itself. You add to that the fact that you’re going through a divorce process which is also stressful in and of itself. And those two things together can be hard, a really hard challenge for a lot of couples to work through. 

My advice to you is to really, really take the approach not of “Oh, it’s not my responsibility to increase income. It’s not my responsibility to decrease expenses. It’s really my spouse’s problem, and I’m not taking on any of this deficit,” or vice-versa because both people have some instinct toward that. That’s not going to go very far, obviously, because the other person is not going to be open to the idea that “Oh, we’re running a deficit of $5000 a month, all of which can fall on your shoulders.” No. But really to try to approach it, even though you are now in different financial camps, to try to approach it as a shared problem. 

Your goal is to fairly distribute the burden of this financial deficit between you, not to have one person shoulder it alone. And also just to acknowledge that sometimes these things take time to resolve. I mean, if it were easy not to run a deficit, you would not be running a deficit, right? If the decisions required of you to be in the black as a family were easy decisions, like to, for instance, take a child out of private school and put them into public school, if that were an easy decision for you, you would have made it already. 

When you’ve been running a deficit for some time, the divorce process often will not immediately improve that, but it will give you a chance to bring some real financial reality to your situation, to look in a realistic and critical way at your situation and say, “Okay. This is not long term sustainable. How can we use the divorce process to help us sort of shift in a direction that will lead us ultimately to be in the black financially?”

 

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