Is Your Client Impacted by the Recession? Now May Be The Time To Seek a Modification of Their Support Payments

Carl J. Soranno and Sean Alden Smith Despite the recent rise in the stock market and promises of an economic upturn, many divorced families have been impacted by the recession and face a number of financial difficulties. For many, the impact of the economic downturn was swift, with an immediate loss of employment, bringing with it a loss of health benefits and an erosion of assets, including a significant drop in the value of their home. For many more, the impact has been much slower and more painful. For those impacted, post-judgment relief may be available through the filing of an application with the family court pursuant to Lepis v. Lepis, 83 N.J. 139, 145 (1980), and its progeny modifying prior support obligations. This article discusses and reviews the nature of these applications, the factors that must be presented to a court and a brief review of the practical realities stemming from the current judicial temperament in considering these applications.

As the recession has eroded income and assets, there may be fewer funds available to provide supported spouses with the lifestyle they may have enjoyed during the marriage. Many post-judgment families are faced with an economic portfolio where their income and assets have fallen below pre-marital levels. The income-generating assets no longer provide the parties with the level of income projected at the time of settlement or trial. Likewise, the supporting spouse may find himself in a situation where his income no longer can support the pretermination lifestyles or the supported spouse has lost her job, finding themselves without this supplemental income. If such events occur, the client can seek a judicial modification in his support obligations due to a material change in circumstances.

The most common circumstance for seeking a modification of support is based upon a change in the supporting spouse’s financial situation — loss of income and reduction in asset valuation. While modification is an exception and not the rule, the moving ex-spouse may be entitled to a downward modification if he meets his burden that any change is permanent and substantial. Be mindful that family law judges must balance the needs of both parties. They must also grapple with the realities of the current volatile economic conditions, but still remain within the confines of the existing case law, which was decided during different economic conditions. Yet, despite the high burden in achieving modification of a prior support order or judgment, one should not be deterred, but should be prepared and understand what factors must be established in order for a modification application to be successful.

Prior to filing an application, in order to maximize one’s ability to obtain a favorable result, various steps should be taken. If a supporting ex-spouse has experienced a legitimate significant reduction in income based upon the loss of a job, which has resulted either in unemployment, or underemployment, it is necessary to document efforts to seek employment consistent with prior levels. Clients should be advised to keep detailed documentation of all job searches. Most colleagues we polled for this article have found that courts are unwilling to accept that posting one’s résumé on the Internet is sufficient to constitute an adequate job search.

In a modification application, clients will be required to file an updated Case Information Statement (CIS). A CIS is a comprehensive financial statement providing a snapshot of the client’s current income, lifestyle expenses and value of assets available to pay support. Failure to file the CIS will result in a denied application and may result in the court imputing income to the defaulting party. Colca v. Anson, A-1822-08T2 (App. Div.). Therefore, the client should keep detailed financial information regarding income (from any source), assets, liabilities and any changes in expenses to submit with the eventual application, and be prepared to highlight and defend the changes from prior applications. The client should also be prepared to explain all investment strategies and withdrawals from accounts made prior to the modification application. Also, a reduction in income may only be a partial consideration. Courts must also review the moving party’s current lifestyle and expenditures. Donnelly v. Donnely, 405 N.J. Super 117, 130 (App.Div.2009).

If the client is self-employed, an application for modification should include detailed and thorough documentation of the applicant’s reduction in income; tax returns will not be enough. The client may be reluctant to allow, or may refuse, a forensic analysis of his business. However, if a closely-held business supports the applicant’s lifestyle, he should be prepared to open his business’s financial books to such an inquiry. In our experience, without this formal inquiry, an application for modification will be highly scrutinized and challenged by both the adverse party and the court. Financial experts are helpful in presenting this evidence to the court, and certain judges will welcome this information and be more inclined to provide greater weight to this evidence if objectively presented.

Finally, when the determination has been made to file the application and the client is prepared to present detailed evidence of a permanent change in circumstances, a number of concerns need to be addressed with the client. The client must be advised that most judges do not grant a retroactive modification to the original date of the change in circumstances. At best, experience reveals that a modification will be granted retroactively to the date of the filing of the application or, at most, the date of the last modification. This advice cannot be overemphasized in order to manage client expectations. The client must also be prepared to thoroughly back up their updated CIS. Following an initial review of the application, a plenary hearing usually follows where a more detailed financial examination is conducted. Opposing counsel will focus on the most vulnerable aspects of the application and challenge the modification based upon a party’s failure to adequately detail current lifestyle, assets and liabilities. Successful applications include more financial disclosure with the CIS than is required by rule and will be necessary at the hearing that may follow. The client must also be advised of the limited likelihood of receiving an immediate temporary reduction in his support obligation. However, this landscape may be changing somewhat with judicial recognition that economic recovery may be long-term.

We found that in cases with limited assets, courts today are more willing to enter a temporary downward adjustment pending a final determination on the request. This temporary adjustment can result in some relief, while maintaining a level of support designed to keep the parties solvent during the economic downturn. Often this difference or arrearage is ordered to be paid at a later date, out of available assets, or tacked on to the end of the support obligation if it is of limited duration. Arrears can also be reduced to judgment, with collection on the judgment held or stayed until the supporting spouse’s financial situation improves. We also found that some judges will accept the applicant’s new employment income for calculating future support obligations rather than the prior income earned during the marriage. This may be a judicial recognition that, in today’s volatile economy, it is difficult for individuals to earn at previously higher levels or an acknowledgement that the change in circumstances may not fit traditional views of permanency.

In high-asset cases, the client should be advised that courts are still very reluctant to permit a temporary downward adjustment pending the ultimate hearing. This practical reality must be taken into consideration when performing an initial analysis of the application. While an individual may not want to hear that his loss of employment or reduction in income is not sufficient for an immediate downward adjustment, a thorough analysis will give the client an ability to make an informed decision as to when it may be appropriate to file an application. This is because courts may look to other assets to satisfy obligations rather than grant a modification.

As a final consideration, the passage of time may be the critical element of a successful modification application. While a client may want to run to court the day after losing his job (or after a reduction in income), he would be better served to properly prepare for the day when such an application is timely. There is no bright-line rule. A modification application is case-specific and most practitioners find that in the past courts were reluctant to grant a downward modification absent a showing of at least a year and, in some courts, as much as eighteen-months of reduced earnings or loss of employment. Thus, it is important not to over-promise results or file prematurely. But don’t be discouraged. As unemployment remains high and the economy is slow to recover, courts appear to be more willing to recognize earlier that modification is appropriate. While in the past much longer time periods were necessary to establish a permanent change, it appears that shorter time periods will be considered under the right circumstances, for example, periods even less than six months.

In our view, clients would be well-served by a modification application that is well-prepared and well-documented with supported efforts by the client to remedy his financial situation. If relief is warranted, do not be discouraged to seek modification earlier than traditionally acceptable to bring the situation to the court’s attention and afford the client some relief, if only temporarily. Sometimes offering a creative resolution along with the application may prove successful. Thus, when approached by a client seeking a post-judgment downward modification in support obligations, a practitioner should take note of the aforementioned trends in preparing the client and the application.