How is debt split in a divorce?

How Is Debt Split In A Divorce

Going through a divorce means learning a new set of terminology, especially when it comes to finances. While divorce law is intended to clarify how to split debt, the process can get messy when either spouse fails to keep up with financial obligations.

It is essential to understand how assets and debt are split in a divorce in order to avoid potential long-term negative consequences.

Community property laws

Arizona has community property laws that divide all debts and assets acquired during the marriage equally between spouses. Pre-existing debt, like student loans from before the marriage, are not split.

In practice, couples do not have to equally divide every asset or debt if they negotiate different terms. For example, one spouse may agree to pay more than half of a mortgage or car payment so that the spouse with primary custody of the children has reliable housing and transportation. If the case goes to court, however, a judge may divide all assets and debts equally.

What a judge decides and what a creditor expects are different stories. If both names are on an account and the spouse taking responsibility for the debt doesn’t pay, both credit scores will be affected.

Exceptions

There are cases where certain property is considered separate, according to DivorceNet:

  • Any property, such as a vehicle or house, owned by one spouse before the marriage.
  • A gift or inheritance for one spouse before or during the marriage.
  • Assets covered by a prenuptial or postnuptial agreement.
  • Certain retirement accounts.

Exceptions will not apply if spouses have “commingled” their separate property, such as when the original owner of a property adds a spouse to the title after marriage. A property is also considered community property if marital funds were used to pay the mortgage.

There are other gray areas, as well.

“Many types of assets can be partially community and partially separate, including retirement accounts in which one spouse contributed to both before and after the marriage, or a business one spouse started before marriage and continued operating after marriage,” according to DivorceNet.

A business owned by one spouse that the other worked at or funded during the marriage can be especially complicated when identifying what portion is community property. A couple will likely find it helpful to consult experienced divorce attorneys who can help determine the best way to divide proceeds.

Another exception to community property law is in cases of waste.

“For example if one spouse spent $100,000 of marital assets gambling, a judge may reduce the gambling spouse’s property award by $100,000,” according to DivorceNet.

Prenuptial and postnuptial agreements

A prenuptial agreement is a contract before marriage that determines what will happen to a couple’s assets and debts if the marriage ends in divorce. Common stipulations include dictating which debts are owned by which spouse and who is the owner of certain property, collectibles, or vehicles.

“A prenup resolves the potentially emotional and difficult negotiations of a divorce before they even get started and helps prevent problems between you and your ex-spouse if anything happens to the marriage,” according to local law firm DeShon Laraye Pullen.

A postnuptial agreement does the same thing as a prenup but is created after a couple is married. It is an easy way to put in writing who owns a business or how to divide inheritances or properties accumulated during the marriage. A postnuptial agreement can also update a prenuptial agreement.

For more information on debt and divorce or to schedule a consultation with an attorney, visit deshonpullenlaw.com.

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