One of the most important questions on the minds of homeowners who are going through divorce is, “Can I afford to keep the home after the divorce?”
More precisely, the party who plans to remain in the home is asking, “Can I afford to maintain the property on my own, given my expenses and my sources of income?”
It’s a tale all too common in the annals of divorce, where a party decides to keep the home, but then finds themselves unable to maintain it.
Meanwhile, the value may have declined. And the party is in much worse shape than if they had done a proper financial analysis at the outset. If they had done so, they would have realized that keeping the home was untenable financially.
In our prior blog “Dividing Property in a Divorce”, we considered the division of marital assets and debts.
In this article we will focus on one asset in particular: the marital home.
We will focus on the decision whether to keep the home. And we will discuss Family Law Software’s new “What If” worksheet designed to help clients tackle this very important question.
Financial Disclosures and Post Divorce Cash Flow
Lawyers and financial planners typically prepare financial disclosure statements for their clients.
But, in order to answer the question of whether a party can keep the home, lawyers and financial planners may have to look beyond the parties’ financial disclosure statements.
That’s because the disclosure statements show the parties’ finances as of the current moment, but the question of whether a party can afford to remain in the marital home requires an analysis of the parties’ finances in the future.
Let’s look at the relevant financial factors in more detail.
First, let’s consider income. The client must evaluate their current and future income. If current income will not enable the client to afford the home, are other income sources available? For example, will the client be able to work more hours, take on more responsibility at their job, take on a second job, or receive financial support from parents, family or friends?
Also, the party will want to consider the impact of child support and alimony on their cash flow. If a party receives child support or alimony, that is usually a reliable income stream that should be factored into the post-divorce income budget. And if the party who wants to remain in the home will be paying support, that also should be factored in to the calculation.
The next factor is expenses. It is expensive to maintain a single parent household. Not only is the mortgage borne by only one party (typically), but the party remaining in the home may need to pay for maintenance and repairs that had been provided without cost by the spouse who has moved out.
In addition to those new expenses, the party who is hoping to remain in the home should consider the existing household expenses, including maintenance and repairs, plus property taxes, utilities, homeowners’ association (HOA) fees, condo/co-op fees, landscaping, and many others.
How Family Law Software Can Help
As you may know, Family Law Software helps the parties’ professionals create court-approved financial disclosures in thirteen states. These disclosure statements are typically prepared using historical or current expenses.
Family Law Software also calculates child support — and spousal support, if there is a statutory calculation — in 23 states.
But Family Law Software’s capabilities go well beyond disclosures and support calculations.
The software also allows you to create a new “case,” where you enter future expenses — the parties’ expenses as they will be after the divorce. (If the parties are already living separately, then perhaps future expenses will be the same as present expenses, and you do not need a new case.)
Using the new or existing case, the program can generate after-tax budgets, cash flow projections, and analyses such as “Can I Keep the Home?”
Using the new or existing case, you can look at net income after taxes and expenses for up to 50 years in the future. You can also look at net worth projected up to 50 years in the future. And now you can specifically ask, “Can I Keep the Home?”
The longer time-frame reports are especially useful in situations of so-called “gray divorce,” where the parties may be at or nearing retirement, and the question of whether the assets will last for 30 or more years may be very important.
But the “Can I Keep the Home?” report is relevant right now, as the parties are often making this critical decision at the moment of the divorce.
In the software, the “Can I Keep the Home” report is located on the Analysis tab, with the other “What If” reports. Each column is one year. The bottom entry in each column is either a “YES” or a “NO,” indicating whether or not the party’s finances support the ability to keep the home in that year.
For example, a party may be able to afford it today, but in a few years, support may end, the party may retire, or other expenses may arise that would turn that to a “NO.” This projection will enable the client to avoid unpleasant surprises in the future. And the client will thank their professional for leading them to be aware of that.
If the answer is “NO,” then the report’s “What If” capability lets the user try different levels of income, expense, child support, and spousal support, to see how much change would be necessary to get to “YES.”
As we mentioned above, the party might contemplate increasing their income, if that is possible, or reducing expenses.
If, even after every possible change, the party can not afford to keep the home, this might be an opportunity to reassess.
Does the party really want to keep the home? This analysis can prompt the client to explore new options and get a fresh perspective. How would a sale of the property (or renting it out) affect the party’s finances and prospects for a secure retirement?
In addition, the party can ask whether it would help them emotionally to depart from the home in which the marriage unfolded.
If the client does decide to sell the property, Family Law Software can help clients calculate capital gains and see the final profit from the sale.
These two unique tools — the new “Can I Keep the Home” worksheet, and the gain-on-sale calculator — can make a real difference to parties who are in the midst of a divorce, and who are making this very important decision.
These tools can help the parties make the decision wisely. It can help them avoid running up later against unpleasant financial realities they should have considered up front. It can make a big difference in the lives of the professional’s clients.
Family Law Software Blog: “Dividing Property in a Divorce”: https://blog.familylawsoftware.com/2023/09/06/dividing-property-in-a-divorce/
FLS Power Webinar on Property Division here: https://www.youtube.com/watch?v=VEYp-eRvY68