What is so Important About Financial Declarations?

Clients often wonder why their attorneys make such a big deal about filling out complete and accurate financial declarations.  Financial declarations are often the most important piece of evidence in any family court case.  Filling them out and executing them in a cavalier manner is dangerous.

South Carolina Family Court Rule 20(a) mandates:

In any domestic relations action in which the financial condition of a party is relevant or is an issue to be considered by the court, a current financial declaration in the form prescribed by the Supreme Court shall be served and filed by all parties.

The form currently prescribed by the Supreme Court can be accessed here in Mircosoft Word format.

Family law attorneys and judges rely on these forms for almost every financial issue in family court.  Child support cannot be correctly determined without an accurate statement of income on page one, along with an accurate reflection of the children’s medical insurance and work related day care expenses.  Without a complete listing of assets and debts on pages three and four, an attorney cannot determine whether a property division proposal is reasonable, nor can the court make a just equitable distribution award.

The listing of income and expenses on pages one and two of the form will often be the primary factor in determining the size of any alimony award.  A party who is seen as deliberately understating income or overstating expenses is often very unhappy with the resulting alimony determination.

Finally the judge will look at the interplay of income, expenses, assets and debts to determine whether and how much attorney’s fees to award the prevailing party as ability to pay is a key component of attorney fee awards.

The family court often utilizes financial declarations in unexpected manners.  Woe be unto support obligors who claim they cannot afford to pay their alimony or child support but list boat payments, club dues, or large car payments on their financial declaration.  I have seen more than one man be incarcerated for being behind on support while making a $600 per month or greater car payment.  In alimony cases one party should rarely argue that the other party’s line-item expense is inflated if that party’s same line-item expense is similar (the exception occurs when one party’s financial declaration covers expenses for multiple people).

Because financial declarations are so vital to determining financial issues in family court, they are the first document I have a client work on once I am retained.  I don’t allow my clients to execute domestic agreements involving financial issues until they and the opposing party have exchanged executed financial declarations.  I rarely begin drafting any type of agreement until my client has provided me a financial declaration that I believe to be complete and accurate.  Too often when I have drafted an agreement–always at the client’s instance–prior the exchange of executed financial declarations, I have had to substantially redraft the document because the financial declarations reveal issues the client had forgotten to have me address.

A failure to exchange financial declarations prior to executing an agreement probably allows either party to repudiate the agreement up until the time they appear in court and obtain court approval of it.  The requirement of full financial disclosure is so axiomatic to the family court process that one has to go back almost four decades to locate a case, Kane v. Kane, 280 S.C. 479, 313 S.E.2d 327 (Ct. App. 1984), discussing financial disclosure as a necessary requirement for court approval of an agreement.

Because financial disclosure is required for court approval of an agreement involving financial issues, a refusal to make proper financial disclosure should be treated as a warning sign.  Opposing counsel who want to discuss financial issues without exchanging financial declarations are rebuffed.  My clients who refuse to provide financial declarations are asked to find other counsel.  On the other hand, because the Supreme Court has promulgated this financial declaration form, parties who repudiate an agreement after its execution will probably not be successful in arguing they did not receive adequate financial disclosure if they received an accurate financial declaration from the other party before they executed the agreement.

Without accurate financial declarations, the family court cannot do its job.  Inaccurate financial declarations reflect poorly on the party presenting them and the family court often makes adverse credibility determinations against a party who files such declarations.  Given the importance the family court places on this document, it is vital for a family court litigant and his or her attorney to make certain the form is filled out completely and accurately.

For any family court trial involving alimony or attorney’s fees, and for most trials involving child support or support enforcement, an accurate financial declaration is the most vital document in the family court practitioner’s arsenal.  A financial declaration requires a party to list current income, expenses, assets and debts under oath.  An inaccurate financial declaration can be devastating to one’s claim or defense.  An incomplete or inaccurate financial declaration can lead the court to deny a party relief, award incomplete relief, or award more relief than would be justified if the court had accurate financial declarations.  It is amazing how often financial declarations fail to be filed when the rules of Family Court require it.  It is appalling how many inaccurate or deliberately false financial declarations continue to be filed.

South Carolina Family Court Rule 20, titled FINANCIAL DECLARATIONS reads in full:

(a) When Required. In any domestic relations action in which the financial condition of a party is relevant or is an issue to be considered by the court, a current financial declaration in the form prescribed by the Supreme Court shall be served and filed by all parties.

(b) Filing and Service. Financial declarations shall be filed and served prior to or at the first hearing, or no later than 45 days after the complaint is served, whichever occurs first.

(c) Effect of Default. If the defendant fails to timely answer or otherwise plead, the plaintiff shall not be required to serve a financial declaration on the defendant prior to the final hearing.

(d) Sanctions. Reasonable sanctions may be imposed upon an attorney or a party for willful noncompliance with this rule.

These instructions are very explicit: File a current financial declaration whenever the financial condition of a party is relevant or an issue to be considered by the court.  File it prior to or at the first hearing, or no later than 45 days after the complaint is served, whichever occurs first.  Failure to file it may result in sanctions against the party or that party’s attorney.  These rules are clear yet often ignored.

Defend a rule to show cause [enforcement action] in which the client’s inability to pay is a defense and an updated financial declaration is required.  Prosecute a rule to show cause in which the other party raises inability to pay as a defense but doesn’t file an updated financial declaration and one can object to that party’s failure to comply with SCRFC 20(a) and either prevent that party from raising inability to pay as a defense or require that party to fill out financial declarations before proceeding further.  Except for the prosecution of rules to show cause, in which the court can award attorney’s fees under a compensatory contempt theory, in seeking attorney’s fees, or defending a claim for attorney’s fees, one needs to present evidence of “each party’s ability to pay his or her own fees… and the effect of the fee on the parties’ standards of living.” LaFrance v. LaFrance, 370 S.C. 622, 658, 647, 636 S.E.2d 3, 22 (Ct.App.2006).  Unless one provides the court current financial declarations of both parties the court lacks the ability to make these factual findings.  While I don’t have clients file new financial declarations for every hearing, I suggest updating them whenever their financial situation is at issue and has changed since the previous financial declaration was filed.

Further, if financial declarations are not filed at the time the court approves a separation agreement or child support agreement, the court will have a harder time determining whether there’s been a change of circumstances when either party seeks a subsequent modification of the agreement.  The South Carolina Supreme Court has noted the difficulties that arise in analyzing a claimed change of circumstances when no financial declarations were filed in the previous action. Upchurch v. Upchurch, 367 S.C. 16, 26, 624 S.E.2d 643, 648 (2006).  Yet numerous such family court agreements continue to be approved without financial declarations having been filed.  I won’t even begin preparing or mediating separation agreements without financial declarations from both parties because, without these documents, one cannot be sure that all the parties’ assets and debts are being considered in negotiating an agreement.

It’s not just the failure to file financial declarations that has ruined many a family court claim or defense; failure to file accurate ones can be equally devastating.  The footnotes on page five of the current financial declaration form, available here, explain how to fill one out.  The first footnote states. “A recent paystub should be attached to the Financial Declaration.”  I frequently see parties file financial declarations without the required attached proof of income and, almost as frequently, see the family court deny relief because that proof wasn’t provided.  These footnotes further explain how net and gross income is to be calculated:

1. To compute Principal Earnings from Employment, first determine whether you are paid semi-monthly, biweekly, or weekly. If you are paid semi-monthly, multiply the gross amount of your pay check by two. If you are paid biweekly, multiply the gross amount of your pay check by 26 and then divide by 12. If you are paid weekly, multiply the amount of your paycheck by 52 and divide by twelve. Round to the nearest whole dollar.

2. To compute Overtime, Tips, Commission, and/or Bonuses, take an average of your monthly earnings from overtime, tips, commission, bonuses, etc. from the past three years or the length of employment if employed less than three years (including this year).

3. To compute State, Local, and Social Security Tax deductions, use the same formula used to compute principal earnings in endnote 1 above, or consult or have your attorney consult an accountant.

4. Net monthly Income is equal to Total Gross Monthly Income minus Total Monthly Deductions.

5. Do not include any expense in the Monthly Expenses section that has already been included in the Deductions from Gross Monthly Income on page one of the Declaration.

Each of these rules are frequently ignored or disobeyed.  Yet the financial declarations are signed under oath and subject a party to perjury if they are knowingly false.  Cross examination that shows a party’s financial declaration is inaccurate on an important issue is highly damaging; showing such inaccuracies are deliberate is devastating.  Yet financial declarations continue to be filed that fail to include second jobs, overtimes or bonuses.   Financial declarations continue to be filed in which claimed net monthly income fails to equal gross monthly income minus total monthly deductions.  Financial declarations continue to be filed that list deductions in the expense section that were already included in the deductions from gross monthly income section.

As for alimony claims, both the ability to pay and the need for alimony will, to a great extent, be determined from a comparison of the income listed on page one of the financial declaration to the expenses listed on page two.  A supported spouse who understates expenses can lead the court to decide that spouse doesn’t need alimony or needs less alimony.  A supporting spouse who understates expenses can lead the court to determine that spouse has a greater ability to pay alimony than her or she actually does.  However overstating expenses (or understating income) can be even more devastating if the court determines that a supported spouse has inflated expenses or hidden income to inflate an alimony claim or that a supporting spouse has inflated expenses or hidden income to reduce an alimony claim.

In handling alimony claims, carefully review both parties’ financial declarations to make sure one’s client’s testimony on the other parties’ expenses isn’t undermined by the client’s own financial declaration.  More than once I have heard a supporting spouse complain about the other party’s particular expense being “unreasonably high” when that own spouse’s financial declaration showed an even greater amount for that same expense.  Cross examination on such “unreasonably high” expenses make the complaining party look foolish.  In alimony cases, whenever my client’s listed expense is lower than the other party’s listed expense, I try to get the other party to concede that my client’s listed expense is reasonable.  A careful comparison of which listed expenses are substantially different from the other’s listed expenses can lead to fruitful testimony to support or defend alimony requests.  Further, in examining the financial declarations of self-employed persons, be careful to consider which listed expenses might actually be paid through the business and whether accelerated depreciations is creating an imbalance between taxable income and cash flow.

Given these concerns, I always fill out or do a line item review of the income section (page one) of a client’s financial declaration and make sure it accurately reflects the attached pay information.  Further, whenever alimony, property division or attorney’s fees are at issue, I take substantial time reviewing the whole financial declaration with my clients before they execute it [when only child support is at issue focusing my attention strictly on the income section and the day care and health insurance expenses is acceptable].  The financial declarations that I have forced some parties to prepare in the midst of trial–because they raised their financial condition as a defense but failed to have a current financial declaration documenting that claim–are often debilitating in future proceedings because I can show them to be inaccurate.

A complete and accurate financial declaration is the cornerstone of most family law work.  Failing to treat this document seriously is a serious mistake.