During a divorce, separating assets and debts can become difficult and lead to many disagreements. Knowing the rules before you start your proceedings can help to protect yourself and assure that you are getting what you should and not paying for debt that isn’t yours.
We’re going to look at how assets and debt are separated during divorce so that you have a clearer idea of what lies ahead.
How are assets and debt separated?
As part of the divorce judgment, the court will divide the couple’s debts and assets. Laws dividing debts and assets vary by state. In some states, community property rules prevail and everything in the marriage is owned equally. No matter where you live, property division in divorce only includes marital assets. You and your spouse keep your personal property.
Marital vs. Separate Property
Marital Property
Marital property includes any money or other assets that either spouse earned or acquired during the marriage. This can change if there was a prenuptial agreement in place or some other type of written agreement to keep certain property separate.
Separate Property
When people talk about separate property in a divorce, they’re talking about property that a spouse owned before getting married or anything that was inherited. It can also include some personal injury awards.
There are times when separate and marital property can get intermingled. If couples mix separate and marital funds in a bank account or use money from a joint account to make payments on a house only one spouse owned before they got married. Either of these circumstances can provide a gray area when it comes to separating assets and debt.
Dividing Marital Property
Many states use a rule known as “equitable division” when it comes to dividing marital property. This means that the couple’s assets and debts will be split between them in a way that the judge believes is fair.
But in nine states, including California, a community property rule is used for dividing marital assets and debts. In these states, spouses equally own all community property. The laws generally presume that community property should be divided equally between the two spouses. But, in California, judges are required to divide a couple’s community property equally, while other states just call for a fair division of community property.
Dividing Investment and Retirement Accounts
Separating investment and retirement accounts can be tricky because clarifying the division of investments isn’t always cut and dry. Factors like risk tolerance and actual value vs. perceived value can make division difficult.
Some couples choose to liquidate their accounts to avoid transfer and withdrawal fees. The division of retirement assets is usually dictated by rules that most plans have in place when it comes to divorce. Your divorce attorney or accountant can help you go over these rules to see the process for division.
Separating Debt in Divorce
Any debt that was taken on during marriage, such as a mortgage, car payment, or tax debt, will most likely have to be split during a divorce. But any credit card in only your name that was never used for joining expenses, may be solely your responsibility.
An important thing to remember when it comes to debt and divorce is that even if your spouse is ordered to pay the debt on a joint account, creditors will come after you if they fail to do so. If your ex does not pay, you can expect a creditor to request a payment from you. When this happens, people typically have to go back to court to ask to be reimbursed.
Mortgage Debt
Dealing with mortgage debt will differ depending on whose name is on the mortgage. If the house is in one person’s name, the court will consider the couple’s financial situation to determine how the mortgage should be split.
In a community property state, the house may be considered property even if it is in one person’s name. A lawyer can help to determine how to proceed in these cases.
If both spouses are on the mortgage, they sometimes choose to sell the house and split the money. This allows everyone to start fresh. When the court decides that one spouse will keep the home or if one wants to keep it, they will usually have to buy out the other’s equity and take over the mortgage.
Medical Debt
In many states, the court will look at whether the couple was living together when the medical debt was incurred. The judge will make a decision on a case-by-case basis when it comes to medical debt. This also applies to medical debt involving a child.
The Bottom Line on Separating Assets and Debt in Divorce
When it comes to separating assets and debt in a divorce, it’s important to make a list to determine what needs to be divided. This will allow you to clearly see what is marital property and what is separate.
Once this is determined, the rules for how property is divided in the state where the divorce is taking place will be applied. In California, a community property rule is used for dividing marital assets and debts, and spouses equally own all community property.
Any debt that has accumulated during the marriage will most likely be split. Any personal debt is likely the responsibility of each spouse.
During a divorce, the more civil both parties can be towards one another, the smoother the process and the division of assets and debts.
