Divorce Requires Financial Disclosures

Financial Disclosures Are a Crucial Step in the Dissolution Process

Introduction

The California Family Code governs the rules and requirements for the divorce process in California. Whether you are going through a heavily litigated divorce or a mediation, all cases are required to complete certain steps. These steps apply across the board and to all cases. Financial Disclosures are one of these steps.

What are “financial disclosures”?

“Financial disclosures” are made of a series of forms which address your income, your expenses, your assets, debts, and more. In a divorce case in California, there are two types of financial disclosures: Preliminary and Final.

For both Preliminary and Final Disclosures, you must diligently complete all forms. It is very important that you make a full and complete disclosure because:

(1) the documents are signed under penalty of perjury, and
(2) their purpose is to prevent either spouse from committing fraud.

If you haphazardly or casually complete your disclosures without being diligent in confirming completeness and accuracy, you risk finding yourself in a situation where you may owe a significant amount of money to your ex-spouse.

Preliminary Disclosures California Family Code – FAM § 2104

The first disclosures completed are known as the “Preliminary Declarations of Disclosure” or “PDDs” for short— these must abide by the requirements of the Family Code.

According to the Family Code, the Petitioner must serve their PDDs either:

1) at the same time as the Petition
2) within 60 days of service of the Petition.

Likewise, the Respondent must either serve their PDDs at the same time as the Response, or within 60 days.

NOTE: While these deadlines are important, parties (and their attorneys) can agree to extend this deadline and often do; however, it must be a mutual agreement and not a unilateral decision of one person to serve them late.

Your preliminary disclosures should include the value of assets and debts as close as possible to the date you sign them.

It’s Important to Support Preliminary Disclosures with Statements

While not mandatory, it is best practice and typically recommended to include with your preliminary disclosures any and all statements that support:

(1) the existence of the asset or debt, and
(2) the value of the asset or debt.

If you provide full and complete preliminary disclosures—including the statements or other supporting documentation—then you will have the option of skipping (also known as “waiving“) the final disclosures.

Final Disclosures California Family Code – FAM § 2105

Final disclosures are very important and function similarly to the preliminary disclosures. Final disclosures are required to be served either:

1) 45 days before the first trial date, or
2) before or at the time parties enter into a settlement agreement resolving their property issues

Final disclosures are distinct from preliminary disclosures because they are legally required to be more in-depth. Specifically, final disclosures require the disclosure of all material facts and information regarding:

• The character of assets and liabilities: do you believe the property is separate or community property?
• The valuation of all assets that are considered to be community property— or property you believe the community has an interest in.
• The amounts of all debts that you believe belong jointly to both spouses—or debt that you believe the community should share in part.
• The earnings, accumulations, and expenses of each party as documented in your income and expense declaration.

This is different from the preliminary disclosures, because the preliminary disclosures are merely required to document the following:
1) the identity of assets each person has a claim to,
2) the debts that you are responsible for,
3) ownership percentages, and
4) whether you believe the property or debts belong to you both equally as community property, or if they are one spouse’s separate property.

The two disclosure standards are very different. This is why we recommend following the best practice, which is to treat the preliminary disclosure as though it is the final disclosure. You will save yourself quite a bit of time and energy if you complete the preliminary disclosures as though they are the final disclosures.

What forms are required?

The same set of judicial council forms are utilized for both preliminary and final disclosures. These forms (accessible via the blue links) are:

• Declaration of Disclosure (FL-140)
• Schedule of Assets and Debts (FL-142) or Property Declaration (FL-160)
• Income and Expense Declaration (FL-150)
• Declaration Regarding Service of Declaration of Disclosure and Income and Expense Declaration (FL-141)

The Declaration of Disclosure (FL-140) will also require that you provide your tax returns for the last two years which you filed, and separate written statements regarding your knowledge about other material facts about your assets and liabilities. The additional statements do not have a form, you must write them yourself.

What are the consequences of failing to accurately complete the disclosures?

The obligation to complete your financial disclosure should be viewed and taken very seriously. The consequences for failure to fully, completely, and accurately disclose assets will vary depending upon the reason for the error and the consequence of the error to the other spouse.

Examples of consequences:

A minor consequence may apply when the error was due to oversight and/or negligence. In this instance, the consequence could be sanctions and attorneys fees.

A catastrophic consequence can and will apply when a spouse intentionally omits an asset or takes steps to hide assets. This is fraud.

Example: George and Ringo married at age 22. At Ringo’s first job out of college at age 24, he set up an employer sponsored 401(k) plan. Ringo was only at this job for a few short years & didn’t contribute much to this account. George and Ringo are now in their 50s and divorcing. Nearly 30 years have passed since that account was created and neither George nor Ringo remembered it existed. A year after their divorce was finalized, George finds documents in his attic related to the account. He brings it up to his attorney and they file a motion with the court. The court hears evidence regarding the asset and orders that it is divided between both ex-spouses and requires Ringo to pay $2,000 for George’s expenses in bringing this to the court.

A ‘catastrophic’ outcome could include a finding that you committed fraud by intentionally omitting assets. In this instance the court is focused on healing any harm caused to the other spouse. The court may make any of the following orders, or combine them:

1) ‘Set aside’ the marital settlement agreement. This is when the court looks at the marital settlement agreement and says it no longer applies and all agreements or prior orders are wiped clean.
2) Giving the hidden asset to the other spouse 100%. This is a complete and total loss of the property to the spouse who hid it.
3) attorney’s fees and sanctions payable to your ex-spouse.

Example: George and Ringo married at age 22. They are now in their 50s and divorcing. In his 30s, Ringo opened up an investment account. Each week he contributed a small amount from their community income to this investment account. He never told George that this account existed. Ringo never discloses this account to George during the divorce. A year after the divorce is finalized, George finds a document related to the account in a box of papers he hadn’t reviewed before. George tells his attorney and they file a motion. The court finds that over the marriage Ringo was able to grow this account to $1million. The court finds that Ringo intentionally failed to include this account in his disclosures and that Ringo’s goal was to hide this account and not divide it with George. Because of Ringo’s motivation to hide the asset from George, the court requires that Ringo turn over 100% of this account to George. Ringo is not allowed to keep any share of the account. Ringo is also required to pay all of George’s legal fees.

Is there ever a scenario where I don’t have to complete these disclosures?

Something we are asked quite a bit is:
“We have an agreement, we’re amicably agreeing to walk away. Do we really have to do this?!” YES.

Every person proceeding through a divorce or dissolution in California must complete — at a minimum — their preliminary disclosures.

Preliminary Disclosure Requirements Have One Exception

There is only one exception to the preliminary disclosures requirement—and it comes up in very limited circumstances.The disclosure is not required when the Responding Party (aka Respondent) does not file their Response, and does not participate in any other way in the case. In this instance, the Respondent does not have to complete their disclosures, only the Petitioner. This scenario is what is known as a “default”.

Note: Not Participating in Financial Disclosures Does Not Stop a Divorce

There are individuals who have the mistaken belief that if they do not participate in the legal process then a divorce cannot happen. This isn’t true. The law in California does not allow an uncooperative person to stall or prevent the other spouse from obtaining a divorce. For this reason, California law does not require a non-participating party to complete their disclosures. The petitioning spouse will not be punished for the other person’s delay tactics.

Both Parties Can Mutually Agree to Waive Final Financial Disclosures

Earlier we discussed the benefit of treating the preliminary disclosures as though they are the final disclosures. It is very common for both parties to mutually agree to waive the requirement for the final declarations of disclosure. This can only be completed when the Preliminary Disclosures meet the requirements of the final disclosures. Waivers are often included in the final marital settlement agreements. There is also a separate one page form that parties can submit to the court.

Conclusion

Most individuals navigating a divorce case find the disclosures to be a tedious process. The disclosures require collecting information, collecting statements, collecting other important documents (such as gift letters), and trying to remember dates when property was acquired. This process can be frustrating to people who are focused on moving forward and separating their lives from an ex-spouse.

Don’t let these feelings stop you from fulfilling your disclosure duties accurately and completely. The consequences of failing to take this procedural step seriously can be disastrous.

If you are navigating a family law case and have questions about your duties of disclosure and the disclosure process, please contact us today to set up a call to discuss your family law matter.