Preparing and exchanging preliminary financial disclosures is a required step in the divorce process. Without the completion of this step, a judge will not grant a divorce. Negligent and wilful omissions of assets and debts when preparing the preliminary financial disclosures can lead to devastating results for the parties. This blog post examines the importance of full transparency and disclosure when preparing the preliminary financial disclosures as well as the possible consequences of not listing all assets and debts, including separate property assets and debts.
First, a little lesson in California divorce law: California is a community property state. That means that, with few exceptions, everything acquired during marriage is community property. Community property includes asset, liabilities and pensions. Whenever a person wants to get divorced in California, the court requires that all issues that were created during the marital period also be resolved at time of divorce. For instance, dividing the assets and the debts, resolving custody and support issues. A mandatory requirement for procurement of a California divorce is the preparation of preliminary financial disclosures.
California law states that before the court will grant a divorce, each party who appears in the case, must fill out preliminary financial disclosures. The preliminary financial disclosures include the Income & Expense Declaration (FL-150) and the Schedule of Assets and Debts (FL-142). The sum of these two documents identifies all separate property and community property income, assets and debts.
The importance of filling out the disclosures: The reason it is so important to fill out the preliminary financial disclosures is because it helps the parties and, if necessary, the court to identify the entire community estate. While it may, at first glance, appear easy to identify the entire community estate, the problem is this: many people who fill out these forms on their own do not understand the definition of community property. By not knowing the definition of community property many times, if not most times, the forms are filled out incorrectly.
Feeling out the forms incorrectly can cause serious consequences to one or both parties! Let me illustrate my point: about a year ago I received a call from a young lady who wished to represent herself in her divorce and wished to seek my guidance in preparing the settlement documents. It was a free consultation. In talking with this individual she conveyed to me that she was confident in her knowledge regarding the family-law process and the preparation of legal documents. As she continued to talk, I soon realized she did not understand the definition of community property when preparing her disclosures. On her preliminary financial disclosures, she listed the 401(k) in husband’s name as his separate property and the jewelry that she inherited from her grandmother as community property. When I asked her why she listed the inherited jewelry as community and the 401(k) as husband’s separate property, she responded by stating that she believed the 401(k) was not hers because she had not earned it and it was in her husband’s name; and, as to the inherited jewelry, she stated that since it had no title, and was acquired during the marriage, it was community property. The marital period was short-term and the divorce process relatively straight-forward. The settlement this young lady reached with her husband was as follows: he would keep “his” 401(k) and she would keep her inherited jewelry. She believed the value of the jewelry to be higher in value; therefore, she felt she was getting the better of the deal. In speaking with me, she learned that the husband had zero entitlement to her inherited jewelry and that she had a 50% entitlement to all deposits made to the 401(k) during the period of marriage. She was shocked and surprised! I illustrate this example because she is a typical caller. Most people who represent themselves don’t understand the fundamental principles of divorce law.
Now, let’s discuss what happens when a person intentionally refuses to list all assets and debts on the preliminary financial disclosures. First, there are serious consequences resulting from a party intentionally excluding any assets debt on the preliminary financial disclosures. One consequence is an innocent party losing out on his or her share of a community asset. For instance, many times people think to not include separate property on the forms because they believe the court has no power to divide separate-property assets. While that is true, the problem is that many times a party misunderstands the legal characterization the property. For example, many people assume that any asset in their name, regardless of when it was acquired, is there separate property asset, e.g. a house bought during the marriage, a bank account opened during the marriage, a 401(k) created before marriage with deposits made during the marital period, and so on. Imagine the unjust outcome that would occur if a person listed everything that is in their name as “separate property” or, even worse, did not list the assets because they believed it was their separate property—even if it turned out to be community property. Let me illustrate this problem with the following example: a husband does not list the 401(k) that has $300,000 because he believes it is his separate property and the wife also believes it is the husband’s separate property. As a result, it is not listed on the preliminary financial disclosures and, further, there’s no way for the court to know of its existence. The result is that husband walks away with the 401(k) and wife walks away with none of the 401(k) even if they were married the entire time that husband was making deposits into the 401(k). In other words, all deposits made into the 401(k) were made during the marital period. Windfall for husband and nothing for wife.
Another consequence of not disclosing all assets debts and liabilities is possible court punishment to the guilty party. For example, a month before husband files for divorce, he buys a lottery ticket that ends up being worth $1 million. Husband intentionally does not tell wife that he won $1 million in the California lottery. Instead, when he wins the lottery, he files for divorce. All the while, wife knows nothing about the lottery winnings. Husband then goes through the entire divorce process never mentioning or referencing the lottery winnings to the wife or the court. The divorce is finalized. At this point, husband believes he got away with his concealment of the asset. Later, wife finds out husband has lots of money because he’s spending much more than what his income can provide. Wife then has the right to return to court and ask the court to not only divide the asset, but also ask the court to punish husband for intentionally concealing the lottery winnings. This example is based on a true story. In the real case, the court punished husband for failing to disclose the asset and as punishment gave the entire lottery winnings to wife. Husband was left with zero.
In sum, even though the forms themselves look simple and straightforward, they are filled with legal complexities.
Just as when a person would want to pay a hairstylist to do your hair for their wedding, it also makes sense to hire an attorney to assist or provide counseling or coaching when preparing the financial disclosures.