A New Approach to Complex Divorces: the Possibilities of Financial Analytics
By Zain Kalson, CEO Etheia | October 2022
Tens of thousands of documents. Financials that don’t add up. Requests for production that never get closure.
This is often the story of high conflict, high net worth divorces. In these cases, it’s all too common for a high conflict party to hide assets, spread false allegations, and misdirect discovery. However, with advancements in legal technology and analytics capabilities, family lawyers can surface new insights and evidence in financial disclosures to compel fair discovery and effectively argue parenting, child support, and alimony terms.
Opportunities for the Fair Exchange of Data
When opposing counsel is high conflict, full disclosure in discovery is rare, particularly with financials. Instead of providing bank statements and credit card records directly from the financial institution, opposing counsel might send paper records (or records not in their native format), statements with missing pages, or documents in which incriminating transactions have been removed. Without a transparent exchange of data, the other party can obfuscate hidden assets, questionable purchases, and their complete income.
Technology solutions are evolving to address these challenges. Innovations in character recognition, data extraction, and classification technologies can pull information from documents, categorize this information, and output summarized results. In the context of family law, these solutions can ingest the other party’s incomplete financials (such as credit card records or bank statements) and identify exactly where information is missing. Previously, this would have required retaining outside experts or assembling a team of attorneys and paralegals to enter data and find the gaps. However, doing so manually can cost upwards of $100,000 per case, an unjustifiable expense for many clients.
Once gaps have been identified (say $21,628 missing in provided June 2022 financial disclosures), family attorneys can follow-up with specific discovery requests. Because of this, opposing counsel, who may traditionally claim these requests constitute “a fishing expedition” or “an overly broad request,” are more inclined to provide the requested data. If they don’t, family attorneys can show the court exactly what information is missing and consider a subpoena.
Opportunities for Finding Hidden Assets
With a complete data set, analytics solutions can uncover financial anomalies, including hidden assets or unreported income. Instead of individually assessing and categorizing thousands (or, in some cases, millions) of financial transactions, these solutions can create spending baselines for each family member. Unusual transactions, such as a liquor store purchase 40% above average, can be flagged and further investigated. Other examples include out-of-city/state purchases, payments for maintenance services not performed on the primary residence, double payments for expenses, changes to recurring purchases, varying income deposits, and large transfers into or out of accounts.
Just one transaction mistakenly made to the wrong credit card can indicate hidden assets or accounts. While these solutions aren’t replacing an in-depth investigation, they can substantially narrow the scope from 20 years of family history to a handful of dates, for example.
Opportunities for Lifestyle Analysis
Performing a lifestyle analysis can provide deep insight relevant to custody evaluations, child support, and alimony. In many states, formulas specified in the law for these calculations may not apply if the parties have a certain income level or net worth. Once again, software solutions can quickly extract and aggregate information on how the parties are spending. Understanding expenses made in service of the children (such as daycare, insurance, school lunches, and extracurricular activities) can justify a proposed number for child support, and the same can be said for alimony calculations.
Such analysis can also reveal dissipation, where one spouse intentionally depletes marital assets. In high conflict divorces, one individual may start spending excessive money on new relationships, making advance payments for future personal expenses, or abusing lines of credit. Many analytics solutions can visualize findings, so charts and exhibits may demonstrate how spending on the above categories has changed over time.
With the complete picture of how spouses spend, it’s also possible to surface hidden money sources. When lifestyle spending matches or exceeds reported income, one can infer that undisclosed income sources fund these expenses.
Software products can often derive insights from discovery data much quicker than manual processes and at a cost that matches client budgets. However, there are likely to be challenges with adoption (as with many legal technology innovations), so vendors will need to align their delivery model with the workflows of family attorneys. Nonetheless, these data extraction and analytics innovations are likely to have massive implications in compelling fair discovery and understanding family finances.
Interested in seeing how you can apply this to your practice? Schedule a demo to see a real use case!