The dissolution of a marriage (divorce) is similar to the dissolution of a business partnership – the division of the assets and debts of the endeavor. However, the division of the assets and debts (called the marital estate) in a dissolution of marriage case involves definitions, exceptions and considerations not found in a business venture.
This article reviews the general issues in dividing the marital estate with the caution that the information in this article is not a substitute for consultation with your domestic relations law attorney if you are in the process of dissolving your marriage.
The phrasing used by courts or the legislature in each state may vary. However, the common concepts are: Marital or Community Property – Assets and debts newly acquired during the marriage, either jointly or by one party, other than by a gift or inheritance to one spouse. Marital assets and debts are divided as provided by the law of the state involved. Most states do not have a set mathematical formula for division and the court will determine a fair distribution based upon a combination of factors as set forth in statute. Community property states by law create a 50/50 division that will be followed subject to any variations provided by statute. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In Alaska, spouses can sign an agreement making specific assets community property. Community property laws affect how the property is treated during the marriage and upon death, not just for purposes of divorce. Non-Marital or Separate Property – Assets and debts owned prior to the marriage that remain unchanged, or gifts or inheritances during the marriage to one spouse (usually including gifts by one spouse to the other). Commingled Property – Assets and debts that were non-marital but which were traded in to acquire new property, repaired or enhanced during the marriage with marital funds, or non-marital debts paid with marital funds. Dissipation – The use of marital assets or creation of marital debt by one spouse for non-marital purposes once the marriage has begun to unravel. The spouse found to have caused dissipation may be required to reimburse the marital estate.
The division of the marital estate as set forth in a valid premarital, or prenuptial, agreement in those states that provide for such contracts to be legally enforceable will control how the debts and assets of the marriage are handled in the divorce absent a compelling change in circumstances during the marriage. It is possible that a court will deviate from the agreement if holding the parties to the agreement would result in one of the parties being impoverished or if there has been a change in circumstances that was not foreseeable, such as disability of a spouse or acquisitions of property not covered by the agreement. In order for the premarital agreement to be valid and binding, it must meet the legal requirements of contracts, including a written document in the form required by any applicable statutes, the full disclosure of all asset information, and each party having an adequate understanding of their rights, usually requiring each party to have separate legal counsel to advise them. Another legal requirement is that the premarital agreement be entered in to voluntarily. While refusing to marry without a premarital agreement is not coercive, inadequate time to consider and evaluate the premarital agreement prior to the marriage can invalidate the agreement. Behavior of the parties that is contrary to the agreement or if the parties expressly void parts or all of the agreement may invalidate or modify the agreement.
Inventory, Status, and Values
The first step in the division of the marital estate is to inventory the assets and debts. The court or your attorney may have a specific form for this purpose. Some courts or attorneys will want an inventory of every individual item, while others will aggregate small items or list only the items worth addressing. Using the inventory, the parties then identify the marital, non-marital, or commingled status of the item. For those items that the parties disagree as to the marital, non-marital, or commingled status, the necessary documentation to demonstrate the status is assembled or witnesses identified to establish the marital, non-marital, or commingled status of the item.
The determination of the values of the marital and non-marital property should be straightforward through use of account statements (for investments and retirement accounts), appraisal, receipts, credit card statements, or other evidence of the value less any debt on the property. Often, a spouse will undervalue the items claimed by that spouse and overvalue the items claimed by the other spouse in order to obtain more of the marital estate, such that appraisals or the sales of items will be required to resolve the valuation issue. The non-marital property is usually valued for purposes of determining the relative wealth of the parties for possible equitable divisions of other than 50/50 or for spousal maintenance (alimony).
The valuation of the commingled items can be more difficult, especially if the period of time of the commingled status is lengthy or the circumstances under which the item became commingled are complex. For investments and retirement accounts acquired both before and during the marriage, the calculations of the marital and non-marital portions can require substantial documentation and become quite complicated. The statutes and court decisions of the jurisdiction may dictate the considerations or formulas in making the valuation of the marital and non-marital portions of the commingled. Finally, the parties will usually identify the items on the inventory each seeks to be awarded or wishes to be awarded to the other spouse. The court will then decide awarding any contested items and determine the total value of the marital estate awarded to each party for purposes of any equalization required or the division of the debts.
Debts and Dissipation
The marital debts are also divided by the court between the parties, regardless of which spouse incurred the debt or whose name is on the debt. Generally, the debts will be awarded to the person taking the property which is encumbered by the debt, such as car loans, mortgages, or store charges, where the creditor can repossess the property for non-payment. The unsecured debts (e.g. personal loans, credit cards, etc.) usually will be divided on the same, or a similar, basis as the division of the assets. When dividing the assets and debts, if a party has dissipated the marital estate for non-marital purposes, that person’s share of the marital estate will be adjusted accordingly or, if there are insufficient assets to make an adjustment, a judgment may be entered against the dissipating party for the amount to be repaid. For joint debts, where both parties signed the contract or credit application, both parties remain liable to the lender on the contract even if the divorce judgment requires one spouse to pay the debt. The divorce judgment establishes the obligation between the spouses, but does not change the contractual obligations of one or both spouses to the lender.
For joint debts or debts assigned to the spouse that did not sign for the debt, the court order should require the party held responsible for the debt to refinance the debt into just their name within a reasonable time after the divorce and such provision vigorously enforced. If the debts are not refinanced, an ex-spouse may find himself or herself subject to collection efforts, finding the debt still on a credit report months or years later, or being held liable for the debt assigned to the other spouse due to the property being destroyed with no insurance coverage (such as vehicles) or the other spouse filing bankruptcy.
Richard J. Coffee is a Senior Attorney in the Fairview Heights, Illinois office of Cordell & Cordell, P.C.