This is the third part in a series discussing what happens when a married couple with shared business interests decide to divorce. The first part of the series explains the types of business interests spouses may share.
The second part of the series discusses how a couple with shared business interests determine the future of those assets in divorce.
Now, let’s take a look at the issue of dissipation and how it can come into play when spouses with shared business interests get divorced.
What is dissipation in divorce?
Dissipation can happen in any divorce situation, but in most cases is relevant to the parties’ personal finances. Spouses getting divorced while sharing business interests are even more susceptible to dissipation, making it potentially very damaging.
When a couple divorce, one or both partners may decide to move, hide or otherwise conceal money or financial assets. This conduct called dissipation has a remedy of restoring the funds to the balance sheet of the parties and can be considered a predistribution to the party who expended the funds. Examples of dissipation include:
Concealment: Hoarding cash, secret bank accounts, large “gifts” to family members
Excessive spending: Unusual expenditures on vacations, clothing, cars, gifts for a non-marital purpose.
Misuse of funds: Applying for loans and credit cards and incurring balances for non-marital purposes.
Financial neglect: Failing to pay business-related mortgage payments, bills, taxes
Dissipation can be an action born of anger, leading to an attempt to hurt one’s spouse. Sometimes it’s driven by fear, if one spouse is worried about not having enough money after the divorce is finalized.
Often when a person commits an act of dissipation with shared business assets, they do so in an attempt to hide or liquidate funds in an effort to convince the court they have less money than they actually do.
Regardless of the intention behind the party’s action, any act of dissipation is improper in divorce proceedings. If a family court judge finds that one spouse has committed dissipation,they may be ordered to reimburse their ex-spouse for the funds they hid, spent or misused.
Dissipation of business funds in divorce
During divorce proceedings, one or both spouses may choose to conceal money, investments, debts or property in an attempt to fraudulently alter the outcome of the court’s decisions related to maintenance, child support or division of assets. They may also spend excessively, or sell marital assets as a way to punish their spouse.
The legal term for these actions is “dissipation,” and divorce cases in which one or both spouses have business interests may be especially prone to this issue. A business provides more opportunities to hide or obfuscate assets by filtering them through business transactions.
Types of dissipation of business assets during divorce proceedings include:
- Concealing business income by hoarding cash or opening alternate bank accounts or investment accounts. EXAMPLE: A contractor keeps cash payments at home or in a concealed personal bank account, not recording it as business income.
- Selling business assets such as property, equipment or inventory outside the normal course of operations, and not accounting for it. EXAMPLE: A bakery owner sells an industrial oven through personal connections, and pockets the money instead of depositing it in the business account.
- Reducing one’s salary or normal business dividends to artificially reduce personal assets that could affect decisions about maintenance and child support. EXAMPLE: The owner of an accounting firm draws less personal salary than in previous years; or she artificially inflates expenses to claim a reduction in the firm’s overall profit.
- Paying out dividends or salaries to third parties as a way to fraudulently reduce the business’ value. EXAMPLES: The owner of a steel manufacturing company gives a longtime salesman an unusually large bonus, hires several new employees, or sells public shares outside the normal course of business.
- Making major business investments in an attempt to drive down a business’ immediate value. EXAMPLE: A fast-food franchise owner takes out a business loan to build a new franchise location shortly before filing for divorce.
Proving dissipation in divorce proceedings
In order to prove that your spouse committed acts of dissipation, the court requires specific proof. This holds true whether it was personal or business assets that were subject to dissipation.
When you make a claim of dissipation in family court, the judge will ask for documentation such as receipts and bank statements from a period of years preceding the divorce case. The judge may also accept as evidence statements from third parties whose knowledge could support or disprove a claim of dissipation.
Though it can be time-consuming and even onerous to collect the materials required to prove dissipation, the cost of not doing so can be much more damaging to your future. Seek out as much evidence as possible to help the judge gain a full picture of the business’ value and how its assets have been managed.
Especially in the case of shared business assets, dissipation can dramatically unbalance the scales of justice. The person on the losing end could find themselves in a financially desperate situation, while the person who committed dissipation possesses a stash of pilfered assets.
Dissipation is a serious act that some people undertake with malice and bitterness. Others may commit dissipation in an act of self-protection, concerned about not having enough money after the divorce is finalized.
A person’s motivation, however, is no defense against dissipation. Each party in a divorce has a responsibility to report an accurate picture of their personal and business finances to the court.
Case law: Dissipation of business assets in divorce proceedings
Here are a few actual instances in which family court judges determined during divorce proceedings that one party committed dissipation of business assets.
In one case, the judge found that one person intentionally or carelessly caused a family business to be less profitable.
In re Marriage of Thomas, 239 Ill. App. 3d 992, 995 (Ill. App. Ct. 3rd Dist. 1993): When one person failed to pay income tax on time and incurred substantial penalties in that regard, a family court judge ruled it an act of dissipation. Failure to pay business taxes could be viewed the same in a divorce case.
In re Marriage of Charles, 284 Ill. App. 3d 339, 346 (Ill. App. Ct. 4th Dist. 1996): The use of an insurance settlement to purchase a new truck and tools was determined by a family court judge to be an act of dissipation.
In re Marriage of Uehlein, 265 Ill. App. 3d 1080, 1089 (Ill. App. Ct. 1st Dist. 1994)
Ask anything about dissipation
If you think your spouse may be hiding money or committing other acts of dissipation, our legal team can advise you about how to collect evidence and documentation. If you’re concerned you have committed dissipation, call us to discuss your rights and options moving forward.
Whether you are a current client or if you are looking for family law or estate planning assistance, our team is here for you address your concerns. To the extent possible, we will offer remote consultations and provide services from a distance.
This is a legal advertisement from Sterk Family Law Group. It does not constitute legal advice and should not be construed as such. This article is for informational and educational purposes only.