Why the 401 Financial Statement is the Most Important Document in your Divorce

The Rule 401 Financial Statements are pink fill-in-the-blank forms. They are very unassuming, mundane looking things, especially the short form for people whose income is under 75K per year. Most people have filled out longer forms than these at their doctor’s office in under 15 minutes, and those forms are so the doctor doesn’t accidentally cut off the wrong leg or trigger some traumatic allergic reaction.

The only reaction I typically see to the financial statement is boredom, but I am here to warn you that not giving the financial statement the attention it is due could be financially traumatic. My clients are always amazed at how much work goes into preparing the financial statement, especially the first one.

The financial statement is one of the most, if not the most, important document you will file in a divorce action. It is so important because it lays out your entire financial situation in one place. It lists all your income, assets, expenses, and debts. It shows the judge what kind of lifestyle you led during your marriage, and what your financial reality is today. It also demonstrates to the court what your financial needs are going forward.

The other major reason it is so important to get the financial statement right is that if your case goes to trial you will be grilled on every aspect of the document by your spouse’s attorney. Any inconsistencies in the document or between the document and the testimony could make you look like you are lying to the judge and could result in the judge making financial decisions that don’t accurately reflect your situation.

Top 5 Mistakes to Avoid

  1. Handwriting your financial statement. I cannot tell you how many financial statements I get from other attorneys that are handwritten in court on the day of a hearing. When I see this I immediately assume the document is wrong and I assume they are lying. Judges also hate this for the same reasons. If you hand wrote your financial statement in court that day that signals to the judge that you did not do the proper research necessary to fill out the document and that you do not respect the court. Remember, you are signing this document under the pains and penalties of perjury.
  2. Statement does not Match Tax Return. This is most important for self-employed individuals. Most self-employed individuals fill out a schedule C when they file their taxes that is used to deduct business expenses from their business wages. The financial statement has a similar mechanism called the schedule A. It also allows you to deduct ordinary and necessary business expenses from your gross income in a more detailed fashion. If the two documents don’t match, at least closely, it opens you up to questioning about inconsistencies, which can make you look like you are lying and/or hiding something. Also, the judges are mandatory reporters so if it is clear you are lying on your taxes they are obligated to report that to the IRS.
  3. Expenses outpace income. The financial statement allows you to itemize your weekly expenses. For example, if your income is listed as $700 per week, but you list your expenses as $2,000 per week that is a huge red flag! Your expenses will typically match up relatively closely with your income, but if they don’t you better explain how you are paying those expenses. You can use footnotes to explain where you are getting the money.
  4. Double Dipping. This is another common mistake self-employed people make all the time. This most commonly happens when people list expenses on the schedule A to deduct them from their business income, and then also list them under weekly expenses. The most common items are phone, vehicles, and home-office expenses. This also sometimes happens when people list something as a weekly expense and then also list it as a liability.
  5. Not using footnotes. Footnotes are great when you are trying to explain anything. For example, say you were not the person in charge of the household finances and you have no idea how much you spend a week on food, or how much the electric bill and heat bill are every month, but you know going forward you will have to pay it. What you would do in those circumstances is with the use of a numbered footnote explain that the numbers are estimates. Footnotes will not only show that you are prepared and respect the court’s time, but it will also make you appear honest and forthright

Many of these mistakes can be avoided with the proper planning and attention to detail. One mistake I see frequently is that people are often being misclassified as 1099 independent contractors or executive employees by their employers.  This is sometimes done to avoid having to pay unemployment insurance or workers compensation insurance, or to avoid having to pay the employee overtime, and can have serious repercussions to an employee. If you think this is happening to you then you should consult a qualified Wage & Hour Attorney.

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