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Episode 63 Transcript: Changes in Spouses' Incomes During Divorce

In this episode, I wanted to talk about something that comes up in a divorce process that can be challenging for both spouses, in particular, where child support and/or spousal maintenance or alimony is on the table. And that is where one spouse’s, in particular, often the higher-earning spouse’s income or financial status quo, but generally their income, has gone down over the course of the divorce process.

Generally speaking, for couples in this situation, at the outset or in the initial, say, year of their divorce process, they will have negotiated some amounts of child support or spousal maintenance. Maybe they’ve exchanged settlement offers back and forth. And their process, for whatever series of reasons, continues to drag on. It’s not resolved in a year. Maybe it’s not resolved in two years. And during that time, the payor spouse, the spouse who is agreeing to pay child support and/or to pay spousal maintenance to the lower-earning spouse, their income goes down for any series of reasons.

Maybe they get laid off by their employer or business and, their industry is not as successful as it used to be, or whatever unlimited number of things can happen that can lower somebody’s income in a divorce process.

But it creates a really challenging situation for the spouses because, generally speaking, what the potential or tentative child support and spousal maintenance or alimony discussions have been up to a certain point in the negotiation start to be questioned by the higher-earning spouse, whose income now may or may not support those levels of support payments.

So what often happens is the spouse who is the payor of support explains to the other spouse or the other spouse’s attorney that their income has decreased for XYZ reasons and, as a result of that, they’re no longer able to honor the tentative settlement terms that they proposed or potentially or tentatively agreed to and that they can now offer something lower.

Well, as you can imagine, when you’re in the midst of a negotiation process, and you are proposing to offer less than your previous offer, which may or may not have even felt like enough to your spouse, the potential that you would be paying less even still than you had originally offered is not received well and, it can really throw a wrench into the negotiation process.

So, I just wanted to touch on a few things that, if this is happening in your process, you can use as tools to consider or get you through the challenge of having a spouse’s income decrease during the divorce negotiation process.

First of all, what you want to keep in mind is that people’s income does change over time, and sometimes it goes down. So it’s not an insane concept to think that somebody in the midst of a negotiation in their divorce process might experience a change in their income and that that might be a downward change in their income.

The thing that becomes complicated in the divorce process is that I think both spouses are understandably wary or potentially cynical about a decrease in the other person’s income. They may be worried that that decrease in income is, in some way, tied to what is sometimes called divorce planning, which may be, “Hmm. Well, listen, if I’m earning X hundred thousand dollars now, and I have to pay this high support amount, but I just don’t work as hard this year to get as big of a bonus, well, then it will be easier for me to argue that I can afford to pay less support, and I’ll have a less onerous support award.”

This actually goes both ways, I would say, and the higher-earning spouse can also feel wary and cynical if the lower-earning spouse’s income, albeit lower than theirs, decreases for one reason or another in the process, which, in theory, might cause the payor spouse to be cynical that the lower-earning spouse is just looking to be entitled to more support in the process.

But in this episode, I just want to focus on what’s happening and how you can look at it and evaluate it when the higher-earning spouse, or the payor of support, when their income decreases during the process.

The first thing you want to take a look at is whether or not the decrease in income is valid. And by that, I mean, is this something that has taken place outside of the earning spouse’s control? So, this is not a decrease in income that the earning spouse intentionally created for themselves. Or maybe they were willfully negligent in not doing a good job at work in a really egregious way and, as a result, their income drastically decreased. That’s another story. If a spouse intentionally or negligently caused their income to go down, then it’s not necessarily fair to take it into consideration in coming up with your ongoing support award.

On the other hand, if despite the earning spouse’s best efforts, their reasonable efforts, they’ve been working as they always have been, doing the same job they always have been, and for no fault of their own, their income has decreased, either again because of changes in the industry or whatever litany of factors causes people’s income to decrease over their lifetime or at certain points in their earning lifetime. If it’s a valid decrease in income that wasn’t created by that spouse, is really not their fault, well, then to my mind, that does augur in favor of considering that new reality when you’re discussing support, even if it means potentially a lower support award.

You could think about it also as if you weren’t divorcing and either one or both of your incomes went down. You would make adjustments in your lifestyle and in your spending and/or you would realize that you either had to spend down from some assets and/or accumulate some debt because you would accept that, “Ok, it’s part of our reality right now that our incomes are down, and as a result, we have to make some changes to accommodate that.”

So, basically, if you assess that the decrease in a spouse’s income is valid, that is, that it’s genuine and, it’s not created by the spouse themselves, then it is reasonable to take their new financial reality into consideration in the context of what their history of earnings has been when you were looking at agreeing on a support amount. And that may mean ultimately agreeing on a support amount that is lower than what you had originally been talking about before your spouse’s financial fortunes changed.

One additional thing I’ll say about assessing whether or not a change in income or a decrease in income is valid. Sometimes it may be quite obvious. You know about changes that have been brewing in your spouse’s…in the company they work for or in their industry. But sometimes it’s not so clear.

For instance, if they run their own business, and you really have no idea what’s happening in their business or who their clients are or what’s happening in their industry, and it doesn’t ring any bells to you or make any sense that their income would go down, you can agree to bring on board a financial neutral, often a forensic accountant or somebody skilled in business valuation, to take a look at, if it’s your spouse’s business, their business books and try to really understand, “Ok, what happened here? Does this seem like a valid change in income, or does this seem more like some divorce planning on the part of the earning spouse?”

The other thing you want to consider, even if you do deem that the decrease in your spouse’s income is reasonable or valid, that they didn’t intentionally create it, you also want to separately look at whether the amount of income they’re earning is reasonable for them in general, not just that, “Oh, yes, I can see how this happened, and the company that my spouse worked for was going out of business and now my spouse is out of a job. And that really wasn’t his or her creation. That’s just reasonable based on what I know to have been happening in his or her industry or with his or her employer.” But you also want to look at knowing your spouse and their earning history and their skills, whether the income that they’re now saying is their reasonable income is actually reasonable for them.

This touches on the concept of earning capacity. So, even if someone is actually earning $50,000 but for the last 15 years or so they’ve averaged $200,000 a year in income, well, $50,000 may not seem like a very reasonable number for them even if it’s what they are actually earning. So you want to consider that as well. And if that’s a point that you and your spouse or the attorneys disagree on, you can look to a neutral employability expert to weigh in on what would be a reasonable income number for your spouse given their earning history and given their professional qualifications.

If you then get to a point where you’ve deemed that, “Yes, this was a valid decrease in income, not something that my spouse created to lower their obligations in the divorce negotiation,” and if you also deem that, “Yeah, based on my spouse’s earning history and capacity, the amount that they’re currently earning does seem reasonable for them,” then you may end up being willing to negotiate a lower support amount.

But two thoughts on that.

Number one. In the agreement, you may want to consider including some kind of formula that’s variable based on your spouse’s income. So you’ll agree to a lower amount of support now, but if your spouse’s income exceeds $X per year at any point in the future, your support amount will bump up to $Y, whatever that amount is, or it will increase by a particular percentage.

And the other thing to do if you can’t come up with a formula for changes to support in the future based on your spouse’s income would be simply to say, “Okay. I’m willing to agree to a lowered support amount now, but I don’t think that this is the income amount that you’ll be at forever. We can’t come up with a formula to figure out how it will feel fair to change support in the future. So instead, let’s agree that this will be our support agreement for three years, five years, or whatever, and we will reassess it at that point in the future. We’ll look at it with a fresh pair of eyes, and we will consider what your income is then and what my income is then, and we’ll renegotiate support at that time.”

In this latter option, a lot of people don’t love it because they obviously don’t love the idea that they’re going to have to come back to the drawing board and negotiate support again. That said, it can be something that is just enough to get you to a deal at the time if there’s been a decrease in income and then a related decrease in support, which is just very challenging in the context of negotiation.

The last thing I want to add for you to consider is I think a lot of people, as they look at the timeline of their divorce process, they have varying senses of urgency for resolving the process. They want to be done in a few months, or they don’t really care, and maybe the process drags out because they’re busy and uninterested in it for four years, to give an extreme example on the other end.

Well, if you have a strong sense that your spouse’s income is likely at high risk of decreasing in the coming years, it’s to your benefit to accelerate the divorce settlement negotiation so that you are not bumping into the challenge of negotiating certain terms based on income levels at the time and then having those income levels drop over the course of the negotiation process and having to adjust or talk about adjusting your negotiated support terms.

Alternatively, if you have a strong sense that your spouse’s income is going to increase at some point in the next year or two years, three years, it may be to your benefit to not accelerate the process and negotiate your final support terms when your spouse is at that higher earning level.

And if you don’t have a sense of what’s going to happen with regard to your spouse’s earning level or your own, I would say you’re in good company because most people don’t.

But to the extent it is clear to you that, in fact, either your or your spouse’s income is trending in a particular direction, you want to think about the timing of your divorce negotiation and accelerating or not accelerating the negotiation timeline in that context and taking into consideration what you think is likely to happen to both of your incomes during the course of the negotiation process.

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