Divorce is a complex process that entails more than just emotional detachment. One of the most challenging parts of the divorce process is figuring out how to divide your property and debts fairly between you and your spouse. Divide your property the wrong way, and it could lead to financial disaster or feelings of unfair treatment that linger long after the divorce case is finalized.
This comprehensive guide will walk you through everything you need to know about dividing property and debt in a divorce. We’ll cover what constitutes marital property, the general rules courts follow for equitable distribution of assets, how to value your property, dealing with separate vs community property, strategies for dividing specific assets like the house, retirement accounts, stock options and more. Read on to learn how property and debt gets divided in divorce so you can protect your rights and achieve the fairest settlement possible.
What Counts as Marital Property That Must Be Divided in Divorce?
Marital property, also known as community property in some states, refers to any assets or debts that were acquired by either spouse during the marriage. This marital property is considered jointly owned by the couple and must be divided if they get divorced.
Marital property includes:
- Income earned by either spouse during the marriage
- Retirement accounts like 401(k)s and pensions
- Real estate purchased during the marriage
- Vehicles purchased during the marriage
- Furniture and other household items
- Money in bank accounts that were opened during the marriage
- Businesses started during the marriage
- Debts like mortgages and credit cards taken out in either spouse’s name during the marriage
On the other hand, separate property belongs solely to one spouse. Separate property is:
- Gifts to one spouse
- Property or assets owned by one spouse before the marriage
- Income or assets acquired after separation
The distinction between separate and marital property is important because marital property is subject to equitable distribution in a divorce while separate property is not.
Debt in a Divorce: What Happens?
In addition to dividing assets, couples must also determine how to handle debts when they get divorced. Just like assets, debt incurred during the marriage is generally considered joint marital debt.
Some examples of debt that may need to get divided in a divorce include:
- Credit card balances
- Car loans
- Student loans
- Medical bills
- Personal loans
Even if a debt is only in one spouse’s name, it may still be treated as joint marital debt if it was used to benefit the marriage, like paying for family vacations on a credit card. The division of property and debts depends on factors like which state the couple lives in and negotiations between spouses.
Separate vs. Marital Property: What’s the Difference?
Understanding the difference between separate and marital property is crucial for determining how assets will get divided in a divorce.
- Separate property belongs only to one spouse. It includes assets owned before the marriage, inheritances, and gifts given to one spouse.
- Marital property includes assets and debts acquired by either spouse during the marriage. Income earned, property purchased, and debt accumulated after marriage is generally considered marital.
Separate property remains the sole property of its original owner after a divorce. Marital property and debt, on the other hand, must be equitably divided by the court during the divorce process. The distinction is important because it determines which assets are subject to division upon divorce.
How Do Courts Divide Property in Divorce? Equitable Distribution Explained
Once marital property has been identified, the next question is – how exactly should it be divided equitably in the divorce?
Most states follow the standard of “equitable distribution” which means marital property is divided in a fair and just manner, but not necessarily equally. The court looks at the totality of the circumstances to decide what split of marital assets and debts is equitable.
Factors considered can include:
Each spouse’s contribution to acquiring marital property – like income, earning capacity, education.
Contributions as homemaker.
The economic situation and needs of each spouse after divorce – earning ability, health, age, education.
Tax consequences of property division.
Length of the marriage.
Whether one spouse dissipated marital assets or misappropriated joint property.
If one spouse has separate non-marital property while the other doesn’t.
Custodial provisions for children which create economic hardship.
Any other relevant factors under state law.
The ultimate goal is a just distribution rather than an equal one. The equitable division can be 50/50, 60/40, 70/30 or any other split the court deems fair. There is no fixed rule that assets be split down the middle.
Valuing Assets and Debts to Divide in Divorce
Before property and debts can be divided, they must first be valued accurately. Figuring out the total marital estate requires determining the current fair market value of all assets and the amounts owed on debts.
Some tips for valuation include:
Get professional appraisals – for real estate, businesses, collectibles etc. Don’t just guess at value.
Value assets as close to the date of divorce as possible – values fluctuate over time so current data is key.
Use account statements to determine account balances – like for bank accounts, retirement accounts, stocks.
For debts, gather the most recent monthly statements showing current amounts owed.
Discrepancies in valuation are common during divorce. If you and your spouse can’t agree on asset and debt valuations, the court may appoint professional appraisers to conduct formal evaluations. Their neutral valuations will determine the marital balance sheet.
How Property Division Works in Community Property vs Equitable Distribution States
Most states follow the equitable distribution approach to dividing marital property explained above. However, in the minority of states known as “community property” states, the rules are different.
Community property states view all assets earned or acquired during the marriage as jointly owned 50/50 by each spouse, regardless of title. The exception is gifts and inheritances which can be individual property. But there is a rebuttable presumption that property acquired during marriage is marital property.
The nine current community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska allows spouses to opt-in to community property treatment.
So in community property states, the default is an equal 50/50 division of marital assets and debts. Unequal division requires proof that equal would be unfair. The community property distinction can significantly impact how property is divided in divorce.
Strategies for Dividing Specific Assets in Divorce
Beyond the general principles, dividing certain assets in a divorce requires special attention and planning. Here are some strategies to consider when dealing with major marital assets and property division:
The Marital Home
For most couples, the marital home is the biggest asset to divide in divorce. Some options include:
One spouse keeps the house – They would need to be able to afford the mortgage solo and buy-out the other spouse’s equity.
Sell and split proceeds – If both spouses want it sold, list it and split the profits.
Transfer with delayed sale – Deed the house to one spouse but delay sale for a set period of years until children are older.
If affordable, keeping the marital home to provide stability for minor children should be a top priority.
Retirement assets like 401(k)s and IRAs are common marital property. Alternatives for division include:
50/50 split – Each spouse gets 50% of all retirement account balances. This is simplest.
Offset with other assets – One spouse keeps 100% of retirement funds while the other keeps more of the house equity or other assets.
Transfer accounts – Attempt to segregate accounts via Qualified Domestic Relations Orders.
Seek guidance on avoiding taxes and penalties when dividing retirement accounts.
Business Ownership Interests
Dividing interests in family businesses or professional practices gets extremely complicated. Some tips if a business interest is marital property:
Have the business professionally appraised to determine its fair market value.
Try to avoid splitting ownership if possible – it often fails. See if one spouse can buy the other out.
Transfer interest but provide for payout of the other spouse’s share over time.
Compensate the non-owning spouse via other property division or support payments over time.
Stock Options and Restricted Stock Units
If stock options or RSUs were accumulated during marriage, they are likely marital assets to be divided. Alternatives include:
Divide the actual options/RSUs – grant each spouse a portion of the equity awards directly.
Cash-out value – If nearing vesting, cash out their current value and split it.
Offset – Allow the employee spouse to keep the equity awards and offset their value via other marital property awarded to the non-employee spouse.
No matter the method, valuation of equity compensation is complex. Engage a financial professional to determine current cash value.
Hide Marital Assets? Big Mistake
A spouse may try to hide assets by not disclosing them or undervaluing them during the divorce process. However, intentionally hiding marital assets is illegal and can seriously backfire if discovered later.
Some warning signs a spouse is hiding assets may include:
- Not providing complete financial disclosures requested by the court
- Suddenly moving money between accounts before or during the divorce
- Not reporting income from side jobs or investments
- Not disclosing gifts given during the marriage
- Having assets in their name only like separate bank accounts or property
If you suspect hidden assets, speak to your divorce lawyer immediately. A forensic accountant can help track down concealed property. If caught, penalties may include:
- Having the entire hidden asset awarded to the other spouse
- Financial sanctions
- Difficulty enforcing the final divorce agreement
- Potential fraud charges
Being transparent about finances allows for an equitable division of property. Hiding assets only leads to bigger problems down the road.
Q: Do I need to hire a divorce lawyer to handle the division of assets and debts?
A: While it is not required to hire a divorce lawyer, it is highly recommended. An experienced divorce lawyer can provide valuable guidance and representation throughout the process, ensuring that your rights and interests are protected. They can also help negotiate a fair settlement and advocate for you in court, if necessary.
Q: How long does the division of property in a divorce usually take?
A: The length of time it takes to divide property in a divorce can vary depending on the complexity of the assets involved, the willingness of both parties to negotiate, and the court’s schedule. In some cases, the division of property can be resolved amicably through negotiations or mediation, while in others, it may require litigation and can take several months or even years to reach a resolution.
Q: What happens if one spouse refuses to cooperate in the division of assets?
A: If one spouse refuses to cooperate in the division of assets, it may be necessary to seek legal intervention. A divorce lawyer can file the appropriate motions with the court to enforce the division of assets and ensure that both parties comply with their legal obligations. This may involve obtaining court orders for asset valuation, discovery of financial information, or even contempt proceedings for noncompliance.
Q: Can the division of assets and debts be modified after the divorce is final?
A: Once the divorce is final and a property settlement agreement or court order is in place, it can be challenging to modify the division of assets and debts. However, there may be circumstances where a modification is possible, such as in cases of fraud or significant changes in financial circumstances. It is important to consult with a divorce lawyer to understand the options and requirements for modifying a property settlement after the divorce.
Key Takeaways – Divide Your Property Wisely When Divorcing
Dividing property, assets and debts during every divorce is complicated but critically important to ensure a fair outcome. Here are key tips to remember:
- Understand what constitutes marital property in your state – almost all assets acquired during marriage are divisible.
- Marital property is divided equitably, which is not necessarily equally under state law. Many factors impact what is fair.
- Valuing assets accurately and getting professional appraisals is key. Don’t guess at values.
- Special rules for property division apply in community property states – the default is 50/50 equal split.
- Certain assets like real estate, retirement accounts, businesses, stock options require special attention when dividing to avoid adverse consequences.
- Full financial transparency is a must – hiding assets will only backfire and sabotage settlement.
Dividing property in divorce is complex but surmountable with the right legal guidance and financial knowledge. Be proactive in learning about property division and valuing assets accurately. With good will and smart planning, spouses can often achieve fair out-of-court settlements regarding property and debt. Consult experienced divorce professionals for personalized advice on the best options to equitably divide your marital estate when starting the property settlement process.