Hidden Assets and Financial Misconduct: California Divorce FAQs

Of all the issues to be resolved in divorce, property division looms largest for many couples. California is a community property jurisdiction, meaning that, by default, all marital assets are split 50/50 upon divorce. But determining exactly which assets are subject to division and how much they are worth is easier said than done, and to do it correctly requires full financial transparency from each spouse. Unfortunately, some divorcing spouses attempt to game the system by hiding assets and engaging in other financial misconduct, which not only is unlawful but also undermines the orderly division of assets. Below are the most common questions about financial misconduct our Stockton divorce attorneys receive, along with our answers. 

What Are the Disclosure Obligations of California Law? 

California law imposes strict disclosure requirements on both divorcing spouses. Under California Family Code Chapter 9, which covers disclosures of assets and liabilities, each spouse must serve on the other spouse a preliminary declaration of disclosure and a final declaration of disclosure. Each of those disclosures must contain the identity of all the spouse’s assets and liabilities, including: 

• Real estate and personal property
• Income and expenses 
• Liabilities and debts
• Investment accounts
• Retirement accounts
• Business interests 
• Financial opportunities 

The disclosure duty is in effect from the date of separation to the date of distribution of the property in question, meaning that each spouse must update their disclosure as their financial circumstances change throughout the divorce process. 

What Does it Mean to “Hide” Assets?

Hiding assets generally means concealing, misrepresenting, transferring, undervaluing, or failing to disclose property or income during a divorce. Common examples of hiding assets are:

• Opening secret bank accounts
• Underreporting income
• Delaying commissions or bonuses until after the divorce
• Transferring funds to third parties temporarily 
• Undervaluing a business interest
• Fabricating loans that are repaid post-divorce
• Withdrawing large sums of cash
• Claiming fictitious expenses
• Laundering personal money through a business 

Readers should note that hiding assets is not only a problem in high-asset divorces; anyone of any income level can commit financial misconduct in a divorce, which is why you should speak to a Stockton divorce attorney if you suspect your spouse of it. 

Does Claiming Community Property as Separate Property Count as Financial Misconduct? 

It can, under some circumstances. Separate property refers to property that belongs solely to one spouse, such as assets acquired before the marriage or by gift or inheritance. Community property refers to property acquired during the marriage. However, separate property can become community property through commingling. Some spouses attempt to misappropriate commingled property as separate property by mischaracterizing funds, providing incomplete records, or altering ownership documents. The process for proving that an asset is separate property is called “property tracing.” If property tracing fails, courts may treat the asset as community property.

What Counts as “Fraud?”

Fraud is more than merely mistakenly failing to disclose an asset. Rather, fraud is deceptive conduct intended to deprive a spouse of their property rights. It typically involves an overt act intended to deceive, such as forging signatures, transferring funds to secret accounts, or altering financial statements. And while the punishment for fraud is severe, it is often difficult to prove, as the party alleging fraud must do so by clear and convincing evidence. That is a higher evidentiary standard than the typical preponderance-of-the-evidence standard used in civil matters.

What Are the Penalties for Fraud, Hiding Assets, and Financial Misconduct? 

Mistakes happen. After all, divorce is a stressful endeavor, and it’s not hard to overlook an asset or two. But there is a fine line between mistakenly failing to disclose an asset and intentionally concealing it, and California law gives family law courts powerful tools to punish the latter. Under California Family Code § 1101(h), a spouse who conceals assets through fraud, malice, or oppression in such a way that impairs the other spouse’s interest in the community estate may face 100% of the asset’s value being awarded to the innocent spouse, as well as attorneys’ fees and court costs. 

What Are Some Red Flags My Spouse Is Hiding Assets? 

Hiding assets and otherwise engaging in financial misconduct are clandestine by nature and often difficult to identify. There may not be a “smoking gun.” Rather, suspicious spouses often must put various puzzle pieces together to get the full picture. Some of the most common red flags that can indicate financial misconduct include: 

• Sudden secrecy around finances 
• Financial documents that mysteriously go missing 
• Unexplained transfers or withdrawals 
• Sudden investment in cryptocurrency 
• Sudden “debts” or loans to friends 
• Delayed commissions or bonuses 
• Claims that a business is suddenly struggling 

It’s important to note that none of these behaviors automatically proves wrongdoing, but when multiple red flags appear together, there may be a stronger case. If you suspect financial misconduct, your best bet to set things right is to speak to a Stockton divorce attorney.

How Do I Prove My Spouse Is Hiding Assets? 

The most important tool you have at your disposal to prove that your spouse is hiding assets is financial records. Unfortunately, financial records may not always be available, or you may not have access to them. Other tools that can help prove that your spouse is hiding assets include: 

• Forensic accounting, in which a professional conducts a forensic audit to trace funds, analyze business records, and identify discrepancies
• Legal discovery, in which you may compel the production of documents from your spouse
• Subpoenas to third parties, such as banks, employers, and creditors 
• Public records searches, which can reveal undisclosed property ownership, business registrations, and secured loans

A Stockton divorce attorney can help you determine which of these methods, among others, would be most advantageous for you. 

Preserve Your Property Rights With Help From a Stockton Divorce Attorney 

If you suspect that your spouse is hiding assets or otherwise engaging in financial misconduct, you should seek the counsel of an experienced attorney. To get started, please contact a Stockton divorce attorney at McKinley, Conger, Jolley & Galarneau via our online form or by calling 209-477-8171.