Articles Posted in Divorce Finances

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In general, family courts disfavor “bad actors” or spouses who take deliberate steps to disadvantage the other party in anticipation of or during a divorce proceeding. Spouses owe each other the highest duties of good faith and fair dealing – even throughout the divorce process. Specific family law codes were enacted to require spouses to be completely transparent with each other regarding their income, expenses, assets, and debts. This same spirit applies to cases involving disputes over the date of business valuation.

It is not uncommon for the divorce process to drag out for months or even years. The length of the process is dependent on many factors including the complexity of the parties’ estate. When one or both parties own a business that business will likely need to be valued prior to the conclusion of the case. As a default rule, assets (including businesses) are valued as close as possible to the time of trial. In a particularly long divorce case, the business may have a substantially different value at the parties’ date of separation as opposed to the date of trial. One way for a spouse to overcome the general presumption that a business should be valued close to the date of trial is a showing of “bad behavior” by the other spouse.

Failure to Cooperate in Discovery: In divorce cases, family court encourage open discovery of information and documents regarding all assets, including businesses. If the spouse managing the business fails to cooperate in producing pertinent business records the court may decide to value the business at the time proposed by the other spouse. Spouses are not permitted to benefit from confusion intentionally caused regarding the facts of the case.

Commingling Business Operations and Poor Record Keeping: California family courts have also selected an alternative date of valuation in cases where the spouse managing a business so intertwined pre and post-separation operations in poor record keeping that it was impossible to determine the date of separation value even though the court otherwise would have done so.

Breach of Fiduciary Duty: As stated above, spouses owe each other the highest duty of good faith and fair dealing. A violation of that duty can result in a date of valuation aimed to punish the offending spouse. For instance, if a spouse mismanages a business he or she may have to brunt the consequences of the mismanagement entirely as a result of the date of business valuation chosen by the court. California courts have also held that neglecting fiduciary duties could be grounds for an alternative date of valuation.
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On March 1, 2014, the San Diego Superior Court began offering a “One Day Divorce” option at the San Diego’s Downtown Family Court. This pilot program provides the option for eligible parties to complete their entire divorce is just one short day. Sounds pretty amazing, right?!

The goal of the program is for parties to walk out of the courthouse with their judgment papers in hand. Parties first meet with a family law expert to go over the terms of their proposed divorce settlement or the process for a default judgment. Then the parties will receive hands on assistance with completing any forms necessary to finalize their divorce. If all of the forms are completed, the parties may appear in court that same day to receive their final judgment.

Offering an extremely fast and affordable resolution to the otherwise typically lengthy divorce process is what the “One Day Divorce” program aims to do. This seems like quite the innovative option. But it inevitably comes with some pitfalls. For starters, those impacted by the new program won’t be as widespread as one would think. Rather, eligible parties are limited only to those who have already filed a petition for divorce or separation in San Diego County at least six months ago, are self-represented, have served the summons and petition on the other party, a proof of service of summons or a response has been filed with the Court, and there are no contested issues. In addition, if either spouse has retirement benefits that were earned during marriage, such benefits must be listed on the petition or response in order to be able to complete the judgment. These limitations narrow down the pool of eligible couples dramatically.

On the other hand, the “One Day Divorce” program doesn’t appear to be as limited as the eligibility requirement for a summary dissolution. Unlike summary dissolutions, the “One Day Divorce” program’s parameters are not limited to couples who have been married less than five years, have no children of the marriage, do not have any interest in real estate, do not have debts over a specified amount, do not have community assets over a specified amount, agree to waive spousal support, etc. This means that cases involving long-term marriages, spousal support, custody, high assets, etc. may take part in the program. However, such cases may be quite complex and perhaps a “one day divorce” approach wouldn’t serve the best interests of the parties. Rather, they might be better off with legal representation to ensure equal bargaining power and knowledge between the parties. Also, the appropriate amount of time and expertise to review all aspects of their divorce might be necessary to ensure that the parties fully understand their situation and have sufficient time to received legal advice before settling.

In any event, the success of the “One Day Divorce” program will heavily depend on its execution. For instance, the “family law expert” that will meet with the parties during the One Day Divorce process poses potential concerns. What will this person’s limitations be? Will he/she act as a mediator or give legal advice? Is he/she a licensed and experienced divorce attorney? If the program’s intent is to solely help parties who have reached agreement on every single aspect of their divorce and either don’t have any further questions or are not able to get legal advice at or during the one day process then perhaps the program will indeed have potential for those truly uncontested cases. But, if the family law expert’s role is to give legal advice then that would likely be another story.
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One of the top concerns for the majority of family law litigants is protecting their financial well-being during the divorce process and beyond. Typically, all divorcing parties must make changes to their lifestyle in order to stretch their family budget enough to support two separate households. The reality in most divorces is that both parties will need to make financial sacrifices and cannot afford to maintain their previous standard of living. However, beyond lifestyle adjustments, most parties also have a real fear that their assets and potential income are in jeopardy as a result of the divorce. If you are worried about protecting your finances in divorce, below are a few tips to consider which prevent future loss.

Create Financial Separation after the Date of Separation

The marital estate exists from the date of marriage through the date of separation of the parties. All earnings and accumulations of the parties (except through gift, devise or bequest) during that time is community property and are shared equally between the parties. After the date of separation, the income of both parties becomes their separate property. Thus, if the primary earner contributes to the support and maintenance of an unemployed spouse over and above the amount required by a support order, the supporting party may request reimbursement. In cases where the parties continue to commingle their spending it can be difficult to later asses how much support has been paid post-separation. It is a good idea to consult with a family law attorney regarding whether you should establish your own checking, savings, and/or credit card accounts.

Learn What you Don’t Know

In a typical divorce case, the parties have the most knowledge regarding the particular assets and debts in their own names. While you and your spouse are still amicable and living under the same roof, it is highly advisable to gather information and documents regarding the assets and debts you are not as familiar with. In addition, it will also be helpful to discover as much information as possible regarding the family expenses paid by your spouse and his or her income. Learning what you do not know prior to a nasty divorce can save thousands of dollars in attorney fees and costs and can also prevent significant delays.

Focus on the Facts of the Case – Not Revenge

Vengeful-minded litigants spend significantly more money in attorney fees and costs than they will likely ever recover from their spouses. Further, vengeful tactics tend to prolong the divorce process making it harder for the parties to move on with their lives and establish emotional stability. In addition, California is a “no fault” state which means that marital wrongdoing is completely irrelevant in family law proceedings.
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During this time of year many people get motivated to clean out their closets and clean up their finances. If you are considering pursuing a divorce this year, you will also want to consider using some of that “spring cleaning” energy to prepare for the changes to come. There are a lot of small steps potential family law litigants can take in order to make the divorce process run more smoothly and affordably.

Get your financial documents in order

With tax season in full swing, there is no better time to collect and organize all of your financial documents. Sit down with your spouse and figure out what each of you earns and how much the family spends each month on living expenses. In addition, discuss all of your joint and separate assets and debts. Collecting documentation on these topics such as income, expenses, assets and debts will save you substantial time and money in the divorce process. At the outset of every divorce case, both parties are required to set forth all material facts and information regarding their finances. Gathering these documents and information ahead of time will jump start your case.

Check into your credit score

In order to start a separate financial life from your spouse you may need to obtain your own loans and credit cards. If there is an error in your credit report, it is better to address it before your potential new creditors discover it. Typically repairing your credit can take a significant amount of time. If you are newly divorced, you will likely need credit immediately for a potential refinance, purchasing your own vehicle, or starting a line of credit. Therefore, it is always a good idea to check your credit sooner rather than later.

Get credit cards and bank accounts set up in your name

One of the most expensive and fruitless endeavors in a family law case is the issue of credits/reimbursements for post-separation expenditures. Once you and your spouse have separated, it is much cleaner for the both of you to begin using separate bank accounts and credit cards. If you untangle your finances at the beginning of the case, you can avoid analyzing mountains of paperwork attempting to decipher who spent what post-separation. If your spouse is not aware that you will be filing for divorce, it is advisable to open new accounts with different entities than the ones which hold your current joint accounts.

Begin to process your emotions

Divorce is an extremely emotional process for a majority of parties. However the process of divorce should be logical and analyzed from a financial standpoint. In order to separate your emotions from your financial decisions, you might want to begin processing the idea of divorce early. If helpful, begin speaking with a licensed mental health professional to deal with your emotional needs. Venting to your divorce attorney about marital discord is less useful and much more expensive than a weekly therapy session.
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Being awarded child support is very important for financial stability of the child support recipient and his/her children. Thus, the possibility of not receiving the child support that is owed can be detrimental. One question often in the minds of child support recipients is whether the payor spouse can avoid paying for child support by filing for bankruptcy.

Luckily, the Bankruptcy Code is designed to attempt to protect the rights of the former spouse to collect child support due to him or her. Congress apparently realized that child support debt is too important and thus should not be able to be discharged in bankruptcy proceedings. Typically when a debtor files for bankruptcy an automatic stay comes into effect which halts creditors from collecting on their debts from the debtor. However, this automatic stay does not apply to enforcement of the collection of child support. The spouse who receives the child support doesn’t even have to file any proof of claim or objection to the bankruptcy court in order to enforce his or her right to receive the child support. Rather, an existing order to pay child support debts remains in effect and will continue to accrue during and even after the bankruptcy case is completed. As a result, a former spouse that files bankruptcy cannot avoid paying child support. However, it is important to note that past due child support that was owed as of the date of filing for bankruptcy might not be paid immediately. The automatic stay will often prevent this issue from being addressed until the automatic stay is lifted, especially if there are many credits in line.

Although child support can be extremely burdensome on the payor, filing for bankruptcy is not an effective means of eliminating the financial obligation. A better forum to reduce child support payments is the family law court, if appropriate factors apply of course. However, filing for bankruptcy might help reduce other unsecure debts such that child support obligations may be easier to afford for the payor spouse.

Another important note is that if you are the recipient of child support and you file for bankruptcy, the child support payments you receive are exempt from bankruptcy proceedings, meaning that those payments cannot be used to pay creditors.
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One of the most common questions posed by supported parties to family law attorneys is “can my spouse force me to work?” Often times supported spouses are threatened by their high earning counterparts with statements like “you could be earning more money,” “you could be earning at least minimum wage” or “I am going to ask the court to make you get a job”. The more money earned by the supported spouse, the less money the supporting spouse must pay in monthly support. However, income is not the only factor considered by the court in setting spousal and child support. According to a recent case, In re Marriage of Ficke, the court must take into consideration the best interest of minor children (if any) when making child and spousal support awards.

The simple answer to the question above is “No,” your spouse cannot force you to get a job, work more hours, or pursue a higher earning position. In addition, the court will not specifically order you to work or to get a specific job. However, the supporting spouse can petition the court for an imputation of income. If a request for an imputation of income is successful, the court will assess an income level (based on ability and opportunity) for the supported spouse and use that amount for purposes of calculating support. For example, if the court determines the supported spouse has the ability and opportunity to earn minimum wage, the court will use a monthly minimum wage number as the income for the supported spouse. As a result, the court does not force the supported spouse to work but essentially pretends he or she is earning up to his or her full potential when setting support. If the supported spouse receives a lower amount of support based on imputation of income, he or she may need to obtain employment in order to meet monthly expenses.

In In re Marriage of Ficke the wife, Julie, was recently laid off from a position where she was earning over $700,000.00 per year. Her husband, Greg, also earned a substantial income during marriage. At the time the court made its support award, Julie was only earning $251.00 per month. However, as a result of different job offers that Julie turned down and the findings of a vocational evaluator, she was imputed with a monthly income of $13,333.00 per month. Julie was awarded a 95% timeshare with the children and $1,368 in monthly child support from Greg. The court also made an award of spousal support payable by Julie to Greg. Julie appealed this order arguing that the court failed to contemplate her inability to work in such demanding positions considering her timeshare with the children. Julie reasoned that such high paying positions required her to work days, nights, and weekends which interfered with her care of the minor children.

Ficke stands for the position that although both parents have an equal responsibility to financially support their minor children, the trial court should not impute income to a custodial parent (like Julie) unless such imputation would benefit the children. California cases have recognized that time spent with children by a parent is incredibly valuable. Therefore, an imputation of income to a custodial parent will not be in the best interest of the children when the imputation deprives the children of considerable time with their parents.
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As we have previously blogged, healthcare can be a big financial concern for divorcing spouses. In many cases, one spouse provides health insurance for the entire family through his or her employer. However, upon divorce, the non-providing spouse must obtain his or her own health insurance. This can be a difficult process if he or she has a pre-existing condition and is denied coverage or if the premiums are prohibitively expensive. Additionally, obtaining health insurance can be especially problematic for those part of the “gray divorce” trend.

Divorce attorneys have noticed that the number of divorces involving spouses over 50 years old has been increasing. This phenomenon is known as the “gray divorce trend“. Many spouses in this age group are even holding out to finalize their divorce until they reach the age of 65 and are eligible for Medicare. Another tactic employed by spouses who cannot obtain outside health insurance upon divorce is to file for legal separation. These couples become legally separated but remain married to maintain their health insurance benefits. This strategy is not always a permissible option under an employer’s healthcare plan and the employee spouse may be charged with fraud and required to make financial restitution.

Beginning January 1, 2014, health insurance may not be such a financial hardship for the uninsured divorcing spouse. Health insurance may be more affordable and more accessible under the Affordable Care Act. Under this Act, health insurance companies will no longer be able to deny coverage or charge exorbitant premiums on the basis of a pre-existing condition. The knowledge of the spouse’s ability to purchase affordable healthcare will take a significant amount of fear out of the divorce process.Since health insurance is a factor considered in support calculations, divorce attorneys anticipate that Obamacare will also have an impact on that area of family law. When calculating child support, the Court will consider the health insurance premiums paid by both spouses and adjust accordingly. The “uninsured spouse” will typically be forced to pay extremely high premiums to obtain insurance and therefore his or her need for support is greater. This means that currently the supported spouse may argue for higher spousal support awards if they are obtaining new health insurance. With the introduction of Obamacare, the supported spouse may have a reduced need for support as healthcare may be more affordable. Additionally, many people may be eligible for a government tax credit toward their health insurance premiums. Undoubtedly, supporting spouses will ask family law judges to take this into considering when calculating support.
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In divorce cases where the parties have offshore assets, those assets are generally not reported to the Internal Revenue Service (“IRS”). However, California family law imposes a strict fiduciary duty of disclosure on all divorcing spouses. Throughout the pendency of a divorce case, the parties are under an ongoing obligation to disclose all material facts and information regarding income, expenses, assets and debts.

This includes unreported income and assets hidden overseas. If a spouse has made efforts to conceal income or assets from the federal government he or she may feel very conflicted about disclosing that information in a state dissolution matter. Therefore, the spouse may be torn by a desire to cooperate with the divorce process and make full disclosures yet fearful of criminal and pecuniary penalties which may be imposed by the IRS. In many cases, both spouses may be aware of the offshore assets or at least suspect they exist.

If a California family court determines that a spouse has failed to meet the strict fiduciary disclosure requirements, he or she will likely be sanctioned in an amount sufficient to deter repetition of the impermissible conduct. In high asset/high income cases, the amount of the sanction could be staggering. In addition, failure to disclose an asset exposes the non-disclosing party to the possibility of the court awarding 100 percent or an amount equal to 100 percent of the asset to the other spouse. On the other hand, if a spouse’s failure to disclose offshore assets and/or reportable income to the IRS is discovered by federal authorities, the spouse will likely face time in jail in addition to substantial financial penalties.

In these cases, the client has limited options. The client could attempt to amend prior tax returns to fully comport with IRS requirements and immediately disclose all hidden assets/income in the divorce case. If a client pursues this option, there is still no guarantee of avoiding federal prosecution. If this option is no longer available, the client could enter the Offshore Voluntary Disclosure Program (“OVDP“). The OVDP was started in 2012 and allows taxpayers to voluntarily disclose offshore assets before they are uncovered by other means. Entering the OVDP can help taxpayers avoid criminal prosecution; however, they will likely still face harsh financial penalties for nondisclosure.

It is incredibly risky for a divorcing spouse with hidden assets or income to fail to make efforts to become compliant with IRS regulations. In a divorce proceeding, attorneys and clients spend substantial time and resources digging into the finances of both parties. It is unlikely that hidden assets or income will remain uncovered under such scrutiny.
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Divorce can have a devastating effect on many aspects of the parties’ lives. In some cases, the parties may not even realize the full effect of the divorce for years to come. For example, in the heat of litigation many spouses may not consider how divorce will impact their social security benefits. In order to get specific information regarding your case, it is important to consult with a divorce attorney who is a financial specialist. However, below are a few general principles to consider.

The first factor to consider in any social security analysis in the context of divorce is the date of separation, and accordingly, the length of the marriage. Neither spouse will be entitled to the other spouse’s social security benefits unless the marriage lasted 10 years or more. A marriage which lasts 10 years or more is typically considered a “long-term marriage“. For the purposes of spousal support, if a marriage lasts less than 10 years, the length of a spouse’s spousal support obligation is generally limited to half the length of the marriage. In a marriage of long duration, the term of spousal support will likely not be limited to half the length of the marriage. Therefore, the length of the marriage will be a significant issue in the context of social security and the divorce in general.

If you are looking to collect social security benefits based on your former spouse’s earning record, the next factor that your divorce attorney will ask you to consider is your marital status. You cannot collect social security benefits based on your former spouse’s earning record if you are currently married. However, if you remarried following your divorce and your second marriage ended in death, divorce or annulment, you may still be able to collect social security benefits as a result of your first marriage. Further, the benefit you would collect based on your former spouse’s earning record must be higher than what you are eligible to collect based on your own earning record.

In order to collect social security benefits as described above, you must meet age requirements and your spouse must meet eligibility requirements. The minimum age to collect social security benefits is age 62. In addition, your former spouse must be eligible to collect or currently receiving social security benefits. In other words, you cannot collect benefits based on your former spouse’s income if he or she is not eligible to collect. If your former spouse is eligible to collect his or her social security benefits but has elected not to receive them yet, you must have been divorced for a minimum of two years before you can collect based on your former spouse’s earnings. If you are considering a divorce, the effect it may have on your social security benefits is another factor to keep in mind when planning for your retirement years.

Read more from SSA.gov about qualifying for divorced spouse benefits
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Along with the emotional challenges of a divorce, financial challenges often also accompany a divorce proceeding. In relation to the many financial challenges, one question that often comes to the mind of our San Diego clients is:

How does divorce affect my credit?

The fact that you are now divorced won’t directly affect your credit, credit scores or credit history. This is because your creditworthiness is not based on your marital status. However, divorce can indirectly affect your credit in a number of ways, and usually not in a good way.

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