When a couple seeks a divorce, their marital assets must be divided between them. Sometimes, the spouses will have prepared for this possibility by drafting an enforceable prenuptial agreement in advance. Other times, they will agree to divide their assets in a certain manner. In such cases, a court will often accept the couple’s decisions.
Unfortunately, few couples plan for divorce. When the time comes to part ways, negotiating the division of assets becomes a challenge for them. If the couple is unable to agree on how to divide their property, a judge will decide for them. He or she may also determine how the couple’s debts are divided between them.
In the space below, we’ll provide a brief guide to the division of property and debt when seeking a divorce. It’s important to realize that divorce laws vary by state. To learn more about the laws specific to your state, it is recommended that you consult an experienced Virginia divorce lawyer.
Community Property Versus Equitable Distribution
As noted above, states adopt different approaches when it comes to distributing assets between divorcing spouses. However, most states follow one of two rules. The first rule involves the concept of “community property.” It requires that the value of the couple’s marital assets and liabilities is split equally between them. Separately-owned property is excluded from the formula.
The second rule adheres to the notion of “equitable distribution” – sometimes called the “all property” rule. Most states follow it, and attempt to distribute marital assets in an equitable manner.
It’s worth noting that equitable distribution is not the same thing as equal distribution. An equitable distribution is simply a fair distribution of the marital assets. Fairness varies significantly based upon the circumstances surrounding the couple’s marriage and divorce. Some states extend the rule further and require one spouse to furnish the other with separate assets in order for the distribution of marital property to be equitable.
Marital Versus Separate Property
Generally, marital assets and liabilities are those incurred during the marriage while separate assets are those obtained prior to marriage. Marital assets are subject to division; separate assets are not. However, there are many exceptions to these principles.
Married couples routinely commingle assets they obtained prior to getting married. Few realize that doing so can lead to such assets becoming community property, and thus subject to division in a divorce. For example, an inheritance is usually considered separate property, even if it was acquired during the marriage. But as with any asset, commingling funds from an inheritance can transform it into a marital asset subject to division if the couple gets a divorce.
In a community property state, the difference between marital and separate property is of particular importance. In most cases, the value of the marital assets or debts will be divided equally between the parties.
Jurisdictions that seek to effect an equitable distribution of assets will often consider whether property is marital or separate in determining how it is divided. A commingled asset is more likely to be divided between the parties in an equitable distribution state.
Marital Debt
As a general rule, secured debt goes with the asset. For example, the party who receives a car or a home in the settlement will bear the burden of the accompanying auto loan or mortgage. Splitting payments on large marital debts, such as a mortgage, is not always feasible or desired. Many spouses resolve the issue by buying out the other party’s interest in the property.
As with marital assets, the manner in which marital debt is divided depends upon whether states follow the community property rule or seek to effect an equitable distribution of property. In a community property state, the court is likely to divide liabilities in half and assign half of the debt to each spouse.
In an equitable distribution state, the matter becomes more complicated. Oftentimes in a relationship, one spouse will be more financially responsible than the other. One spouse may suddenly and inexplicably accumulate a substantial amount of debt. In that case, a judge may agree with the other spouse that he or she should not be burdened by the indebted spouse’s reckless spending habits.
Having said that, most creditors will pursue anyone whose name is listed on a loan application or credit card, regardless of whether the liability was incurred for the other spouse’s benefit. Moreover, creditors are likely to do so even if a divorce court judge has decided that the debt should become the responsibility of one of the spouses. A judge in an equitable distribution state may also place the burden of the debt on the party receiving greater assets simply because of his or her ability to pay.
To be sure, the division of marital property and debt during divorce can become a complex matter, even if things initially seem straightforward. But it is almost always better to negotiate such details outside the court system. The alternative is to allow a judge who is unfamiliar with the marriage or relationship make the final decision.