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What a Financial Statement Is and Why You Need One

Many clients describe the Rule 401 financial statement as "a giant pain," "putting square pegs into round holes," or "the most annoying thing I've ever done in my life." While filling out a financial statement can often be fairly simple, sometimes it can take days or even weeks of work. Filing a financial statement may actually happen many times over the course of a proceeding, and the parties may even choose informally to exchange financial statements on a voluntary basis. Why is it then, that almost every party to a domestic relations matter has to fill out a financial statement?

First, it is required by the rules of court. Supplemental Probate and Family Court Rule 401 outlines the rules and regulations relating to financial statements and makes it clear that "each party to a divorce or separate support action or any other domestic relations action where financial relief is requested, shall file with the court . . . a complete and accurate financial statement." The rule also provides that financial statements need to be filed before a hearing on a motion for temporary orders or a pre-trial conference. A financial statement must also be filed on the first day of trial or at a hearing where final relief is sought, e.g., a hearing where one seeks to present a separation agreement to the judge or an agreement for judgment in relation to a contempt or modification action.

Second, a financial statement is one of the most useful and important documents used in a domestic relations case. A financial statement outlines the income and expenses of the person completing the form - on a properly completed financial statement, you should be able to get a good sense of what a person earns, where those funds come from, and where those funds are spent. A financial statement also includes a list of assets and liabilities - on a properly completed financial statement, you should be able to see which bank, retirement, and brokerage accounts a person has (and how much is in them), what real estate interests there are, whether they own vehicles, or any other assets they have (e.g., partnership interest, interest in a trust, ownership interests, etc.). You should also be able to note all of the liabilities - credit card debt, student loans, car payments, etc. Think of the financial statement as a snapshot of a party's financial circumstances at the time.

Why is all of this information necessary? First, the court requires that each party make a full and accurate disclosure of his or her financial circumstances to the other. It is important to note that the financial statement is signed under the pains and penalties of perjury and represented to be "complete, true, and accurate." Knowing misrepresentations on a signed financial statement may result in criminal charges filed against that party.

Furthermore, the information obtained from a financial statement is necessary to be able to understand, negotiate, and agree to terms in relation to a child support order, alimony award, and/or asset division per Massachusetts law. A person cannot make an educated, informed decision about any of these matters without having a full understanding of the financial circumstances. This is true of parties representing themselves and of parties represented by counsel. The parties and/or their lawyers benefit greatly from having this "snapshot" of the finances for both parties - this is why, as mentioned before, the disclosures are often done voluntarily during proceedings. Keep in mind that the financial statements are automatically impounded and not subject to inspection as public records relating to an ongoing public proceeding.

The forms - there is a short version for those who earn under $75,000 per year and a long version for those who earn $75,000 or more - can often be confusing and rigid. However, parties should also remember that, when a component in the financial statement needs to be explained in more detail beyond just putting a number on a page, any explanatory notes can (and should) be footnoted. In fact, the financial statements are not as difficult to complete as they look and guidance by a seasoned attorney is almost always very helpful in completing a financial statement. Having well-crafted financial statements on both sides can often make the difference between having a slow, protracted case or having the benefit of information needed to move a case along in an efficient manner.

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