In my ongoing efforts to simplify the process of divorce, I have boiled it down into four basic steps. First, getting educated on the law and the issues. Second, the exchange of a thorough and complete disclosure. Third, resolving the issues through settlement or by presenting them to a Judge for determination. Fourth and finally, preparing all necessary paperwork to finalize things. In this week’s blog we dive a little deeper into Disclosure and answer the questions of what, when, why and how. Taking the time to understand the rhyme and reason behind our state’s disclosure requirements is essential so that you can take the necessary steps to assure your compliance with the requirements and so that you can reap the benefits intended by the requirements.
For Starters, What is Disclosure? Family Code 2103 states under no uncertain terms that in every Dissolution of Marriage or Legal Separation proceeding spouses are mandated to exchange a full and accurate disclosure of all assets and liabilities in which one or both parties may have an interest. Family Code 2104 dives into more particulars of what constitutes disclosure. Disclosure includes a listing of all assets and liabilities along with all income and expenses. With regard to assets and debts Family Code 2104, Section C(1) provides: “The identity of all assets in which the declarant has or may have an interest and all liabilities for which the declarant is or may be liable, regardless of the characterization of the asset or liability as community, quasi-community, or separate.” The requirement includes providing the percentage of interest or percentage of liability if the asset or obligation is not owned or owed in its entirety.
In addition to a full listing of assets and liabilities, Family Code 2104, Section E requires “each party shall provide the other party with a completed income and expense declaration unless an income and expense declaration has already been provided and is current and valid.”
Also tucked away in Family Code 2104 is the obligation for couples to exchange “all tax returns filed by the declarant within the two years prior to the date that the party served the declaration.”
What does all this mean? There are two components of disclosure; (1) the required forms and (2) the supporting documents.
The Forms: The property part of the disclosure is covered with FL-142, more commonly called the Schedule of Asset and Debts. This schedule includes a full inventory of all assets and obligations, including real estate, furniture and furnishings, vehicles, bank accounts, life insurance, investments, retirement, business interests, student loan debt, personal loans and credit card debts. The FL-150, more commonly called the Income and Expense Declaration, lists all sources of income and household expenses. This form includes an exhaustive list of all possible sources of income and an inventory of all categories of monthly expenditures. Each of these forms are to be completed and exchanged along with the FL-140 which is the cover form for the Disclosure. The FL-140 also includes a certification that confirms compliance with the Tax Return exchange requirement referenced above, and a disclosure of any investment, business or other income producing opportunities that might have presented since separation but are attributable to efforts during the marriage. Getting these forms completed is half the battle.
The Supporting Documents. The other half of the disclosure requirement is the exchange of all the supporting documents to verify values listed on the forms. Any of the assets that have documents confirming value, balances, etc. are required to be included with the exchange of the disclosure. With the Schedule of Assets and Debts this includes such things as deeds, mortgage statements, bluebook valuations, bank statements, investment statements, retirement statements, appraisals, insurance policy statements, etc. With the Income and Expense Declaration the supporting documents include the last two months of paystubs, profit and loss statements, and documents confirming all other sources of income, including such things as retirement statements, disability statements, etc.
Why Disclosure? There are two really good reasons to comply with the disclosure requirement. The first is because you have to. It is not optional and failure to disclose can be grounds for having everything later set aside or can be grounds for sanctions (financial punishment) if the failure to disclose was intentional. The second reason for disclosure is it is the cornerstone for accomplishing fairness in the proceedings. It does so by delivering both spouses to a place where they know the extent and value of their assets and obligations so they can make well informed decisions on the appropriate division of the things accumulated during marriage. It also provides clarity as to the income and finances of the couple so that well informed decisions can be made when addressing the issue of child and spousal support.
I have not worked with too many couples that enjoyed the work involved with compliance with the disclosure requirement. It is a necessary hassle, not just for complying with state mandated requirements, but to assure that everybody is on equal footing when the decisions are made.
Timing Requirements. Family Code 2104 (F) provides clear direction on the timing requirements for when disclosure is required to be exchanged. The code identifies two separate disclosure requirements; the exchange of the Preliminary Disclosure and the exchange of Final Disclosure. Let’s address them one at a time.
Preliminary Disclosure. Family Code 2104 states “The petitioner shall serve the other party with the preliminary declaration of disclosure either concurrently with the petition for dissolution or legal separation, or within 60 days of filing the petition.” The exchange requirement is clear. For the petitioning party the deadline for service is 60 days after the filing of the initiating paperwork. The statute goes on to explain the timing requirement for the responding party: “The respondent shall serve the other party with the preliminary declaration of disclosure either concurrently with the response to the petition, or within 60 days of filing the response.” Based on this requirement, both parties can expect to receive the preliminary disclosure from the other in these time frames.
The code does allow for the extending of these time requirements either by written agreement, or by further order of the Court. With the requirement that the preliminary disclosure be exchanged early in the process it is important to note that as more information becomes available the preliminary disclosure will necessarily be updated to add items. This does not mean you can intentionally leave off certain assets from early disclosure, it just illustrates that while you are required to prepare and exchange these documents early, it can reasonably be expected that they will be adjusted as information is gathered.
Final Disclosure. Family Code 2105 addresses the timing requirement for exchange of the Final Declaration of Disclosure. “Except by court order for good cause, before or at the time the parties enter into an agreement for the resolution of property or support issues other than pendente lite support, or, if the case goes to trial, no later than 45 days before the first assigned trial date, each party, or the attorney for the party in this matter, shall serve on the other party a final declaration of disclosure and a current income and expense declaration.”
Waiver of Final Disclosure Family Code 2105 provides guidance on when the couple can opt to waive the requirement for exchange of the final disclosure. In a nutshell, if the Preliminary Disclosure provided a full and accurate disclosure, and the Income and Expense information is current, then the couple can waive the need to do a final disclosure. It is very important to note, pursuant to Family Code 2015 that the agreement to waive final disclosure “does not limit the legal disclosure obligations of the parties, but rather is a statement under penalty of perjury that those obligations have been fulfilled.”
Disclosure in Mediation. The task in mediation is to get the couple all the information and documents they need so that before decisions are made, a full and complete understanding of the extent of the community estate and income situation of the parties is at hand. Oftentimes, in mediation a Petition for Dissolution of Marriage is not filed until settlement is reached. The formal exchange of disclosure cannot take place until the case has been filed so very often in mediation all information is getting exchanged so educated decisions can be made without the formal Preliminary Disclosure having been exchanged. With all of that said, a complete and thorough disclosure must be formally exchanged before the couple proceeds with signing off on the Marital Settlement Agreement. In my mediation practice it is common for the couple to exchange the Preliminary Disclosure just prior to signing off on the agreement. Well before this “formal” exchange the couple has had ample opportunity to review all necessary information for them to make educated decisions. While there is a waiver of the Final Disclosure, the Preliminary Disclosure is taking place after all information gathering has been completed so contains a complete disclosure.
Sorry for hitting you with so many statutory citations and legal mumbo jumbo. Disclosure is an extremely important part of the divorce process and it is invaluable to understand all disclosure requirements, not only so you can comply with the responsibility but also so you can take advantage of the requirement to assure you are in a well educated place to make all the important divorce decisions that lie ahead.