Going through a divorce can be a complicated and stressful process. When it comes to dividing assets and debts, the situation can become even more challenging. If you and your spouse cannot agree on how to divide your property and debts, a court will make the decision for you. But how does a judge make a fair division? This article will provide a comprehensive guide on how courts identify, value, and divide assets in a divorce.
Understanding Community Property and Equitable Distribution States
One of the most important things to know when it comes to dividing marital assets and debts is whether you live in a community property or an equitable distribution state. In community property states, all marital or "community" property is divided equally (or 50/50) in a divorce. Separate property, on the other hand, stays with the spouse who owns it.Community property is defined as all property that is jointly owned by a married couple or property that was acquired during the marriage, through either spouse's labor, efforts, or skill. Separate property, on the other hand, is the property that is owned separately by one spouse and is not usually divided in a divorce.
Factors that Affect Property Division
There are a number of factors that affect property division, depending on the laws of the state that has jurisdiction over the divorce. To understand your local laws, it is critical to consult with an experienced divorce attorney.Separate Property: What it Includes
Separate property includes:- Property that was acquired before the marriage, for example, a savings account that you opened and funded before you were married or a car that you purchased and paid off before the marriage
- Property that was inherited or was a gift to one spouse, even if the inheritance or gift happened during the marriage
- Businesses owned prior to the marriage (but if both spouses added to the value of the business during the marriage, through work or investments, there may be a community value to a separate business as well)
- Either spouse's pension proceeds that vested prior to marriage
- Personal gifts acquired by either spouse or given to one spouse by the other (depending on state law)
- Property or income acquired after the date of separation or the date of the divorce (depending on state law).
Exceptions to the Rules
Despite these fairly universal rules, there are always exceptions. For example, personal gifts are assumed to be the property of the spouse who received the gift, unless a spouse can show that the item was never intended to be a gift. To avoid confusion, it is always best to have a record of the circumstances under which all valuables are acquired, including after a separation and up to the date that the divorce is final.Commingling of Separate and Community Property
Commingling can occur when one spouse deposits a separate inheritance into a joint bank account the couple uses to deposit their pay. In this case, the inheritance might be considered community property. To avoid confusion and ensure that the division of assets is fair, it is important to document the circumstances under which all valuables are acquired at any point in time.Community Property States
In community property states, all marital or "community" property is divided equally (50/50) in a divorce. Separate property, on the other hand, stays with the spouse who owns it. Community property is defined as any property that is jointly owned by a married couple, or property that was acquired during marriage through either spouse's labor, efforts, or skill.Separate property, on the other hand, is the property that is owned separately by one spouse. This type of property isn't usually divided in a divorce, and absent some unusual circumstances, such as commingling (discussed later in this article), it is awarded to the owner's spouse. Examples of separate property include property that was acquired before the marriage, property that was inherited or was a gift to one spouse, businesses owned prior to the marriage, and either spouse's pension proceeds that vested prior to marriage.
However, it's important to note that there are always exceptions to these rules. For example, personal gifts are assumed to be the property of the spouse who received the gift, unless a spouse can show that the item was never intended to be a gift. For example, if one spouse purchases and gives the other a very expensive necklace during the marriage, but the couple treats it as a jointly-owned investment, rather than part of the recipient spouse's personal wardrobe, the necklace might be considered community property.
To avoid confusion, it's always best to document the circumstances under which all valuables are acquired, including after a separation and up to the date that the divorce is final. Even though some states, including California, use the date of separation as the cut-off date for determining if a certain property is community or separate, it's always best to have a record. Memories fade, and during a divorce, spouses tend to "forget" about oral agreements they may have made in better times.
Equitable Distribution States
In equitable distribution states, a judge divides property and debts in a manner that is considered "fair and just," taking into account several factors, such as the length of the marriage, each spouse's income and earning potential, the couple's standard of living during the marriage, and each spouse's age, health, and financial status. In this type of state, the judge does not divide property and debts equally, but rather considers each spouse's financial needs and circumstances to determine what is considered "fair and just."Factors That Influence Property Division in a Divorce
Regardless of whether you live in a community property or an equitable distribution state, there are a number of factors that affect property division during a divorce. Some of these factors include:- The length of the marriage: In general, the longer the marriage, the more likely it is that property and debts will be divided equally, although this can vary from state to state.
- Each spouse's income and earning potential: The judge will consider each spouse's income and earning potential when dividing property and debts in a divorce.
Valuing Marital Assets
When it comes to dividing assets and debts in a divorce, it's important that the court have accurate information about the value of each asset. The court will typically hire a neutral third-party appraiser to determine the value of assets like real estate, businesses, and personal property. The court may also consider expert testimony from financial professionals, such as accountants, business valuators, and financial planners.
The court must also consider any liens or encumbrances (claims by creditors) on the property. For example, if you own a house that has a mortgage, the house will have an encumbrance equal to the mortgage balance. The court must consider this in dividing the property.
The court will also consider the income-generating potential of each asset. For example, if you own a business, the court will consider how much income the business generates and what its future potential is.
Equitable Distribution States Equitable distribution states don't divide property equally, but instead divide property "equitably," which means "fairly." This can result in a division that isn't equal, but that the court considers fair given the circumstances.
In an equitable distribution state, the court considers a number of factors when dividing property, including:
The court must also consider any liens or encumbrances (claims by creditors) on the property. For example, if you own a house that has a mortgage, the house will have an encumbrance equal to the mortgage balance. The court must consider this in dividing the property.
The court will also consider the income-generating potential of each asset. For example, if you own a business, the court will consider how much income the business generates and what its future potential is.
Equitable Distribution States Equitable distribution states don't divide property equally, but instead divide property "equitably," which means "fairly." This can result in a division that isn't equal, but that the court considers fair given the circumstances.
In an equitable distribution state, the court considers a number of factors when dividing property, including:
- the length of the marriage
- the age and health of each spouse
- the income and earning potential of each spouse the standard of living during the marriage
- the contributions each spouse made to the marriage (for example, one spouse may have stayed home to raise the children, while the other worked outside the home) any prenuptial agreements or postnuptial agreements the tax consequences of the division of any debts or liabilities whether either spouse wasted, destroyed or transferred property with the intent of depriving the other spouse of its value. When dividing property in an equitable distribution state, the court must first classify the property as either marital property or separate property. Marital property is all property acquired by either spouse during the marriage. Separate property is property acquired before the marriage or by inheritance or gift during the marriage.
The court must then value the marital property and determine how to divide it equitably. This may involve selling assets and dividing the proceeds, or it may involve transferring ownership of specific assets to one spouse or the other.
Protecting Your Interests
If you're involved in a divorce, it's important to have a clear understanding of your rights and obligations when it comes to dividing assets and debts. You may wish to consult with an experienced divorce attorney to help you navigate the process and protect your interests.
Conclusion
Dividing assets and debts in a divorce can be a complex and emotional process. However, by understanding the laws and procedures in your state, and by seeking the help of an experienced divorce attorney, you can ensure that your rights are protected and that the division of your property and debts is fair and equitable.
