Dividing Property and Debts in a Divorce
When facing divorce, often times the most difficult and time consuming task for the couple is determining how to divide the property and debts. If both spouses are involved and working toward a common equitable goal, then the division can be accomplished jointly and with less complication. If the parties do agree on the separation of property and assignment of debts, it is very important to note that the division is not final until the judge signs the order.
In a divorce, each spouse retains his or her separate property and debts, while the community property and debts are divided between the spouses. The first step is to make a list of all the assets, indicating value and whether the asset is separate or community property. In California, assets and debts that are accumulated during marriage are presumed to be community property. Separate property is that which the spouse owned before marriage or inherited or acquired by gift during the marriage. If either spouse acquires property after the separation but prior to the final divorce order, the property is presumed separate property. Unfortunately, separate property can inadvertently become community property if it is combined or “commingled” with marital property.
Once the asset list is created, how does the couple decide who gets what property? Because the property should be divided fairly equally between the spouses, the couple has options: they can assign certain assets to each spouse; sell assets and divide the proceeds; “buy out” the other spouse; or continue to own an asset jointly after marriage. Owning property together after a divorce is not common, and when it occurs, it usually involves the family home and the desire to maintain stability for the children. The couple must also assign all debts to each spouse, noting that the separation of debts is not binding on creditors, and therefore, they can attempt to collect the debt against either spouse.
If the spouses cannot agree on the division of property and debts, then the court must decide. Mediation can be very helpful if the couple is unable to determine an equitable separation of property and debts. Why would the couple be unable to reach agreement? Complications may arise if the assets and debts are significant or evoke an emotional response, such as a family-owned business, a valuable retirement plan or pension, or a second home. It can be very challenging to reach an agreement, especially if the divorce is already contentious.
Because some assets may appreciate or depreciate, be illiquid or difficult to sell, or have tax implications, each spouse should be aware of the financial and tax consequences of owning a particular asset. If both spouses understand the implications of dividing the assets and debts, then they will be better equipped to amicably reach an agreement.