When I was a child in the early 80s, I remember adults discussing inflation and its effects. Then, the issue of inflation disappeared for 40 years. Now, inflation is back and it is impacting all of our assets, incomes and expenses. Everyone needs to factor inflation into their future financial plans, especially people who are facing divorce in Illinois.
As of the writing of this article in April of 2022, inflation stands at 7.87% percent per year in the United States. Inflation hasn’t been this high since 1982. How can inflation affect an Illinois divorce?
Expenses and Inflation In An Illinois Divorce
Every Illinois divorce requires the parties to exchange financial affidavits.
“(i) The Petitioner shall serve the completed “Financial Affidavit” not later than thirty (30) days after service of the initial pleading and the Respondent shall serve the completed “Financial Affidavit” not later than thirty (30) days after the filing of the Responding party’s appearance; or
(ii) Not less than seven (7) business days prior to a hearing, whichever date first occurs” Cook County Court Rule 13.3.1
If you are in a high-inflation environment it is crucial that you put your actual expenses as they are reflected in current-day prices and not in what you presume things cost (because you will use your memory…which will reflect what things used to cost).
Living expenses do not matter too much in an Illinois divorce because support issues are largely determined by the incomes of the respective parties.
Still, in a high-inflation environment, a case can be made for deviating from guidelines child support and guidelines maintenance due to the expectation that costs are accelerating.
“The court may deviate from the child support guidelines if the application would be inequitable, unjust, or inappropriate.” 750 ILCS 5/505(a)(3.5)
“The court is not required to order maintenance in accordance with the statutory guidelines.” In re Marriage of Hamilton, 2019 IL App (5th) 170295
I don’t think inflation of expenses is an especially strong argument for initially deviating from guidelines child support or maintenance. But, it’s an argument for modifying support.
Inflation And Modification Of Support In An Illinois Divorce
Support is initially set at an exact number in Illinois pursuant to guidelines.
“Under Illinois law, all maintenance awards are reviewable.” In re Marriage of Kasprzyk, 2019 IL App (4th) 170838, ¶ 23
“An order for maintenance may be modified or terminated only upon a showing of a substantial change in circumstances.” 750 ILCS 5/510(a-5)
“An order for child support may be modified as follows:(1) upon a showing of a substantial change in circumstances; 750 ILCS 5/510(a)(1)
Inflation might be argued to be a substantial change in circumstances for the purposes of modifying support if inflation increases one or both parties’s incomes sufficiently.
If the parents’ incomes have increased due to inflation in such a way that the child support should increase by more than 20%, that will be an automatic finding of a substantial change in circumstances. An automatic modification will be granted “upon a showing of an inconsistency of at least 20%, but no less than $10 per month, between the amount of the existing order and the amount of child support that results from application of the guidelines” 750 ILCS 5/510(a)(2)
During the last bout of inflation in the 1970s, Illinois courts did not find inflation alone to be a substantial change in circumstances.
“We do not believe that inflation in itself is sufficient to establish a material change in circumstances.” Goldberg v. Goldberg, 332 NE 2d 710 – Ill: Appellate Court, 1st Dist. 1975
“In the absence of evidence of defendant’s increased ability to pay, it has been held that inflation alone is insufficient to show a material change in circumstance in that it affects both parties” Addington v. Addington, 363 NE 2d 151 – Ill: Appellate Court, 1st Dist. 1977
It should be noted that while incomes may increase due to inflation, tax brackets are not expanding commensurately. So, as a party enters into a higher tax bracket the net income will not increase proportionately with the gross income.
True Ups And Inflation In An Illinois Divorce
While I usually abhor the idea of a true up in an Illinois divorce, I may recommend a true up for a divorce in a high-inflation environment.
With income and expenses changing each year, setting support in dollar amounts may not provide adequate support in the future (and would, thus, require frequent modifications).
The parties can agree in their Marital Settlement Agreement to “true up” their divorce agreement once a year. A true up will usually involve a comparison of each parties’ income to determine what the ongoing support should be for the following year.
“A [Marital Settlement Agreement] is a type of contract, to which the normal rules of contract interpretation apply” In Re Marriage of Solecki, 2020 IL App (2d) 190381
Just because the parties agree to contract for a reviewable divorce decree does not mean it will be a good idea. True ups require the parties to relitigate portions of the divorce on a yearly basis. This is a recipe for ongoing conflict and the variability of incomes had better be worth the conflict.
Inflation And Tax Deductions In An Illinois Divorce
Inflation may cause a business person in Illinois to make tax decisions that defer taxes to a time when the paying the taxes will be easier due to inflation (still a bet on higher inflation). These tax maneuvers should not be taken at face value when calculating income for the purposes of child support or maintenance in an Illinois divorce.
“The accelerated component of depreciation and any business expenses determined either judicially or administratively to be inappropriate or excessive shall be excluded from the total of ordinary and necessary business expenses to be deducted in the determination of net business income from gross business income.” 750 ILCS 5/505(a)(3.1)(A)
An accountant should be retained to determine if any inappropriate or excessive deductions or expenses have been on a party’s tax returns.
Inflation And Judgments In Illinois
Chasing down money owed from an ex-spouse is a huge hassle. So, the Illinois legislature let you at least make a profit off of their delay in payment.
“[J]udgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied” 735 ILCS 5/2-1303
9% was a massive interest rate in the old era of almost zero inflation. Judgments would double in 8 years.
9% interest when official inflations is almost 8% is trivial.
Inflation And Valuing A Business In An Illinois Divorce
If either party owns a business in an Illinois divorce, that business may be considered marital property and thus be divisible by an Illinois divorce court.
Inflation has a massive impact on how a business is valued in Illinois. Every business is considered to be a stream of income whose present value must be determined.
This stream of income is compared to the risk-free rate of return (a treasury bond) when determining the present value of the business. The higher the risk-free rate of return, the less valuable the business. After all, why own 50 storage lockers that have to be cleaned and maintained when you could just own a bond that pays a similar coupon?
Inflation inevitably increases the risk-free rate of return. The risk-free return increases the “capitalization rate” which is used to divide the business’s income when determining the value of a business via the capitalization rate.
Oddly, the risk-free rate of return is 2.39% as of the writing of this article despite inflation being 7.87%. Why anyone would buy a treasury bond in this environment is beyond me but inflation hasn’t affected the risk-free rate of return…yet.
Additionally, a business may find its costs increasing due to inflation increasing the price of expenses. This inflation would impact the net profit if there are not equivalent sales price increases. A reduction in income, means a reduction in value for a business being divided in an Illinois divorce.
Inflation has profound affects for all of our future financial decisions. If you’re going through a divorce in an inflationary environment, you need to understand what you can expect in a world of rising prices. Contact my Chicago, Illinois family law firm today to learn more about how inflation impacts your divorce and your future.