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Equitable Vs Equal Division Of Assets And Debt What Does This Mean

On Behalf of | Jun 9, 2015 | Firm News

Arizona statutes say that divorcing parties’ community property and debts will be divided “equitably.” In practical application, what does that mean to you? Depending on the nature of the asset or debt, it can mean entirely different things. And what is “community property?” Anything you acquired during marriage that was not acquired by gift, devise, or descent (devise and descent refer to inheritance).

Here’s a summary of the most common divisions of assets and debts that you can use as a rule of thumb, bearing in mind that every case is different and different judges view these things differently.

1. Retirement accounts:
The portion of retirements earned during marriage are almost always divided equally unless the parties agree otherwise. These are usually divided by a document called a Qualified Domestic Relations Order, and that is almost always prepared by a separate attorney that is an expert in doing these particular orders. The order is signed by the judge on your case, and then sent to the administrator of the retirement account. At that point, the administrator contacts the party receiving their identified portion, and gives them options for distribution. These options range widely, depending on the limitations of the retirement plan itself.

2. Real property owned by both parties as community property or as joint tenants:
Assuming that the property is 100% community property: If property is to be sold, the net equity in the property is almost always divided equally unless there are offsets for the value of other property awarded to one spouse or the other. If real property is going to be awarded to one party, that person must find a way to buy out the other party’s share. This typically involves getting an appraisal or at least a reliable estimate of market value, and then either refinancing the property to pay off the other party, or offsetting the value of that spouse’s share with other property equal to that value. When doing this kind of equalization, the court does not usually take into consideration the costs of sale, since no sale is taking place.

Note that the value of after-tax assets, such as real property, does not trade dollar-for-dollar with before-tax assets such as retirement. For example, if the spouse’s share of real property is $10,000, we would not “trade” that equity for $10,000 in additional retirement funds. Retirement is before-tax, and usually cannot be accessed before a certain age. Thus taxes, and perhaps penalties, have to be considered, and after taxes are estimated, that retirement has to be reduced to present day value, before we could determine how much retirement would actually be equal to the $10,000 in after tax dollars. This is a complex calculation.

3. Real property that is not all community property:
This can get very complicated. For example, if one party owns a house at the time of marriage as sole and separate property, sells that house, and then uses the proceeds as a down payment on another house that is then titled in joint tenancy. The law presumes a gift to the community, and all the equity is then considered community property. BUT– if a married couple live in a house that is the sole and separate property of one spouse, and that spouse wants to refinance and then puts the house in joint name solely because that spouse’s credit is insufficient to refinance, then there are occasions that the court will still find that property is the sole and separate property of the original owning spouse. AND, when a married couple makes payments on a house that is the sole and separate property of one of the parties, the other spouse may have a claim for a community lien against the increase in value of the property, because community funds made the payments over a period of years. You can see that there could be many variations to these scenarios, and you really must consult a lawyer about your particular situation.

4. Personal property:
Judges hate it when parties want the judge to divide the things in your house. DON’T take a list of “stuff” to court and expect a judge to say who gets what, because it will always turn out in some manner you won’t like. Here are a few pointers on personal property:

a.) Personal property is valued at garage sale prices.
b.) Cars are valued at Kelly Blue Book private party value.
c.) Engagement rings and wedding rings are the sole and separate property of the recipient, even though they can have very significant value.

It’s always best to divide personal property between you and your spouse before going to court on the big issues.

5. Ownership of businesses:
Businesses that are owned by one spouse before marriage, and are worth more at the time of divorce, are still the property of the owner. However, the non-owning spouse can have a claim for the increase in value that occurred during the marriage.

Businesses that are started during the marriage, regardless of the form of business (e.g., corporation, LLC), and regardless of who owns the stock, or who is a member, are still, for the most part, community in nature unless documents were signed in the course of business waiving a spouse’s interest. Business valuation almost always requires the opinion of an expert witness.

Again, this is a complicated area of law, and to determine a party’s interest it’s best to consult with an attorney.

6. Debts:
Secured debt: This is easy. If you are awarded a car that has a loan, you will almost always be responsible for the loan. If you are awarded a house, you will almost always be responsible for the mortgage. Almost? Yes, there are rare occasions when the court might decide something else, but it’s rare.

Unsecured debt: Equal division of debt is common, but not a rule. For example, if spouses have credit card debt of $20,000, and one party makes three-fourths of the income, and there’s no spousal maintenance that changes that income proportion, there’s an argument that an equitable division of the debt should be in the same proportion.

Debt for non-community purposes: Sometimes one spouse will run up credit card debt for something that doesn’t benefit the community, such as gifts to a mistress. That debt is not something that the other spouse is responsible for. Be aware though, that this rule doesn’t include things like gambling debt or illegal drug use. Again, it’s time to consult an attorney about this issue.

These are just a few examples of the questions that come up about property division. There is no black and white, every case is different, so if you and your spouse cannot reach an agreement it’s best to consult an attorney for help.