To make himself appear cash-poor, the debtor, a small business owner, increases his business’s discretionary expenditures knowing that he can recoup the money after the divorce is final.
This problem can take several forms such as overpaying employees, as we discussed here, buying expensive merchandise with the intent of returning it later, or overpaying vendors.
If you have access to the company’s financial records, an important first step is to familiarize yourself with the business’s past practices. Combing through historical financial records will show you whether there have been any recent anomalies in the debtor’s spending patterns.
Pay special attention to any unusually large payments to vendors who are related to or friends with the debtor. They are the most likely to be willing to help the debtor and to give him his money back once he’s made a purchase. Again, look at historical records to determine who the vendors are and how much they are normally paid, then compare that information to records from after the debtor caught wind of the divorce. If the company’s financial records show an upswing in inventory or supplies purchased from vendors but flatlining or decreasing income prior to those purchases, then there may be cause for suspicion. There are few reasons to spend more on vendors when business is bad.
A visit to the debtor’s place of business can also uncover unusual purchases. For example, receipts may show that the debtor spent $100,000 buying new office furniture, but a walk-through showed the same old particle board desks that have always been there. It could be that the debtor purchased the furniture, but had the seller to store them to avoid the cost of moving items that he knows he will soon return.
Say the debtor owns an auto body repair shop, and he says he spent all his cash on new equipment. Tour the facility with someone who is familiar with that type of business who can tell you 1) whether the new equipment is really worth what the debtor says it’s worth, and 2) whether the equipment is necessary or even helpful for running the business.
While financial records are crucial, sometimes a good old fashioned phone call can do the trick. If you know the company’s office manager, have a friendly chat with her. She may be more than happy to let you know that she has been crazy trying to get in tons of vendor orders. She may also be able to tell you how often the company usually orders new furniture or equipment to gauge whether the purchases are out of the ordinary.