California Divorce Dictionary: Section 2640 Claim

A Family Code Section 2640 claim is a request for reimbursement based upon one spouse’s Separate Property contribution to the acquistion of Community Property. A reimbursement would be due from Community Property to the contributor spouse’s Separate Property to reimburse the contributor for their contribution. A reimbursement claim may be applicable to the extent the spouse can trace his/her contributions. The reimbursement amount is limited to the total amount contributed. Making a 2640 claim will require tracing, forensic accounting and a paper trail. Examples include downpayment on a home purchase or payment for improvements financed from Separate Property funds.

 

Bankrolling Divorce

The New York Times ran an article December 4 2010 titled “Taking Sides in a Divorce, Chasing Profit” . The piece details the emerging business of bankrolling litigation. In this case, Divorce  litigation.

“With some in the financial world willing to bet on almost anything, it should be no surprise that a few would see the potential to profit from the often contentious and emotional process of ending a marriage.”

I am encouraged by the opportunity this creates. Here is how it works and why I see the idea as a welcome twist.

In California, family law attorneys are required to be paid up front in a retainer form rather than on a contingency basis common in other forms of litigation. When retainers run out they must be refreshed. As divorces drag on and fees mount, one spouse may find themselves with no cash to continue paying the attorney charged with protecting their legal rights. This leaves the party with control over the family assets in a position of power and may lead to the out spouse, the one without control, being pushed into a corner during settlement discussions. Faced with taking the deal offered by their soon to be ex or incurring additional legal fees they can not pay, the out spouse will often choose to take a deal that is less than equitable.

Divorce Bankrolling would loan the out spouse the additional funds necessary to prepare and sustain a case as long as necessary and help level the playing field during litigation. Of course it is not without costs. Clients end up paying back the loan along with a percentage of the “winnings”.

What remains unclear is what exactly does winnings mean. To make a truly fair exchange for value and compel me to recommend the service to clients I would need to know just how the lender will define “winnings”. It seems impossible to calculate two versions of the settlement, one before the loan and one with the loan, then calculate the difference and call it “winnings” but this seems to be the closest thing to a true contingency type arrangement. Divorcing clients are rarely faced with fighting for millions at the risk of getting zero as is done in the world of civil litigation. So how do we determine the true value of this service?

I will keep my ear out to see how the idea progresses. The New York Times reports the business is small but quickly gathering interest. Time will tell if it also gathers supporters and clients.

 

Ever Wonder Why Frequent Flyer Miles Seem So Valuable?

People often focus on near-term concrete goals in financial decision-making. While trying to maximize these immediate and clear goals they forget or discount the real reason for the actions. This is called Medium Maximization. Having something measurable within reach can redirect our motivation. Immediate and concrete goals by which to measure ourselves give a sense of progress. Plus it just seems an easier decision to make.

When an airline offers a frequent-flyer program it allows members to accumulate miles. The miles begin to obtain value to the program member despite being only a medium you can trade for free travel. The member doesn’t truly care about the miles. He cares about the benefit of accumulating those miles, free travel. The medium, in this case, frequent flyer miles, truly has no value yet still draws the concentration of the program member. “The money we earn from work is also a medium. Thus, the potential implication of research on medium is not medium; it is extra large.” Christopher Hsee, Journal of Consumer Research, June 2003 

The tenet of Medium Maximization says people often fail to fully skip over the medium (frequent flyer miles) in favor of the benefit (free travel). For example, consider the opening scene to the film Wedding Crashers. The scene concentrates on a divorcing couple in the midst of a Divorce Mediation session. They begin arguing over who should be awarded the frequent flyer miles. Frequent flyer miles and other frequent buyer or cash back rewards programs are considered by family law courts to be a community asset in California. The husband says “I earned those miles”, the wife seems to agree but believes he earned them on trips to see his -insert expletive- girlfriend. The miles are the medium to this couples’ financial decision-making process (dispute). By focusing on the medium (frequent flyer miles) rather than the benefit (free travel) of owning the medium, they have both failed to consider the decision at hand from a rational perspective. The real decision at hand is who will be awarded the right to free travel in the future not who gets the frequent flyer miles. The value of this free travel can be estimated fairly easily. Twenty-five thousand (25,000) miles might earn a one way ticket from Los Angeles to New York while the same ticket would actually cost $300. The wife lost sight of the benefit of the miles immediately when she associated the medium with the outcome in her mind, her cheating husband. She has missed the point by concentrating on the medium rather than the benefit.

The wife is very clearly upset by the situation and allows her emotions into the decision making process. I don’t blame her. The point of the illustration is to realize that economic theory tells us people will never concentrate on the medium because it has no value. The emotional turmoil of the dispute in the movie tells us humans often place a value on the medium and may ultimately make emotional decisions because of their tendency for medium maximization. Understanding Behavioral Finance can help mitigate emotion but we can never hope to completely remove it making Behavioral Economics vital to appreciating real life financial decision-making especially in Divorce Financial Planning.

 

 

Financial Infidelity Survey

A non-profit organization, CESI Debt Solutions, recently completed a survey of more than 200 American consumers. The survey revealed some interesting facts about how couples manage their finances in a marriage and revealed frequent financial infidelity.

According to the survey 80% of couples have at least one member who spends money their spouse does not know about. Almost 20% of married individuals have a credit card with a balance unknown to their spouse. 38% of those with secret spending habits and credit card balances worry their spouse would consider divorce if they ever learned of the Financial Infidelity.

Clothing and Accessories top the list of secret purchases with 35% of respondents reporting they buy purses, clothing, shoes, jewelry, etc.. in secret.

When asked why the spending was kept secret, the overwhelming majority said it was to avoid problems at home.

Access the full Press Release here http://www.cesidebtsolutions.org/downloads/marriageanddebt.pdf

 

California Divorce Dictionary: 4320 Factors

§4320 Factors; The factors set forth in Calfornia family Code Section 4320 for determining the proper amount of permanent Spousal Support.  Earning capacity, marketable skills, child-rearing, education, the foregoing of education, contributions to careers, “marital standard of living”, interests of the minor children, length of marriage, half the length of marriage, presumption of lengthy marriage and the needs of each spouse.