What if a family’s income was just fine supporting one household but may not be enough to support the two different households created by the final divorce decree?
This is very different than when a family has a comfortable income, low debt, and adequate retirement assets. That can be – barring hidden assets and the like – relatively straight forward. For a family, however, living paycheck to paycheck or perhaps running a business, and/or carrying significant debt facing divorce it can be challenging. Extremely so, particularly when one or both spouses are self-employed.
Recently Acquired Income Deficiency Syndrome
The reasons are many. For one, the income from self-employment can vary greatly from month to month and can be impacted by forces beyond their control. Sometimes income from self-employment is impacted by a well-known phenomenon referred to by family law attorneys as “RAIDS” – Recently Acquired Income Deficiency Syndrome. This occurs when someone’s income takes a mysterious dive just as a divorce action is filed. Suddenly, the self-employed who controls how much they work; what bills they pay and don’t pay; what jobs they take and don’t take, ends up earning far less as the divorce proceeds than they did before.
More often than not, though, the reason a self-employed person’s income dips precipitously during a divorce is the divorce itself. Divorce is stressful and can legitimately impact a person’s ability to function optimally. That would affect anyone with a job, but the self-employed are especially vulnerable.
Beyond that, there are always issues with self-employment income in a divorce for the simple reason that the money that goes into the bank seldom reflects the real benefits of owning a business. The business may pay for the owner’s car, pay for the car insurance, gas, service; provide a cell phone and service; health insurance; many other legitimate business expenses that the owner would otherwise have to pay out of pocket. Those types of expenses reduce a person’s normal expenditures and are recognized by the courts as an “in-kind” benefit. That means that beyond what cash a person earns from their company, the court will include the value of all the other things that the owner’s company supplies as ‘in-kind’ benefits.
These benefits may be difficult to quantify. They can be relatively easy to conceal. Travel to ‘seminars’, luxury vehicles; country club memberships; insurances; meals and entertainment; cable and wi-fi; and almost any other daily, weekly, and monthly expenses you could name. All these should and need to be considered by the court when it comes to support.
While most small business owners are able to legitimately deduct multiple expenses from their taxable income, those same benefits will be realized in divorce court as part of their income in addition to their taxable income for the purpose of calculating spousal support.