The Anatomy of a Divorce,
Part 3: Debt Allocation
In an Arizona divorce, a dizzying array of statutory and factual issues can influence the determination of whether a debt is "separate property" or "community property"
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The Anatomy of a Divorce, Part 1:
The Anatomy of a Divorce, Part 2:
The Anatomy of a Divorce, Part 4:
Child Custody and Access
The Anatomy of a Divorce, Part 5:
The Anatomy of a Divorce, Part 6:
The Anatomy of a Divorce, Part 7:
Awards of Attorney's Fees
More Articles on Divorce-Related
During a hearing on asset distribution in one of my recent
divorce cases, the judge praised both parties for “actually having assets to
distribute,” as most of the cases before him deal more with allocation of debt
than with division of assets.
As the economy slowly improves, the emphasis on
responsibility for debt in divorce should lessen; however, that shift is likely
to be slow, and debt allocation is likely to remain a very prominent issue in
divorce proceedings for the foreseeable future.
Generally, the factors that define assets as separate
property or community property also apply to debts:
If a debt was incurred by one
party prior to marriage, it should remain a separate debt and be uncollectible
against the marital community.
Debt incurred during
marriage, even if incurred only in the name of one spouse, will generally be
considered community debt.
respect to the second point, there are certain statutory exceptions. One notable
example is that the signatures of both spouses are generally required to charge
the community with liability for (a) buying, selling or encumbering real
property, (b) a guaranty, indemnity, or suretyship and (c) any debt incurred
after the service of a petition for divorce, legal separation or annulment, if
it results in a decree.
In addition to statutory exceptions, there are factual
variances that can affect categorizing, as separate or community, a debt that
was incurred during the marriage. One critical factor in distinguishing whether
a debt incurred by only one spouse (with or without the knowledge of the other
spouse) should be considered separate or community is whether such debt was
intended to benefit, or did benefit, the marital community.
That determination is often subject to dispute. For
example, should a student loan that one spouse incurred during the marriage be
considered community debt or separate debt? The “non-student” spouse will argue
that the loan is the separate debt of the “student” spouse, since the student
spouse will solely benefit from the education or degree long after the divorce
decree is entered. Conversely, the student spouse will contend that the debt was
incurred in order to obtain an education or degree that would benefit the
community. Under most circumstances, such a debt will be considered an
obligation of the marital community.
Other Issues. What
about gambling debt, or debt incurred to maintain a lover? These types of issues
tend to get complicated by burdens of proof and the manner in which the debts
were incurred. The stronger your evidence is, the more likely you will obtain a
successful resolution short of trial.
It is common for debts to be transmuted from separate to
community, such as when both parties refinance a separate debt for new value.
Separate debt may also be paid off with community funds, which typically sparks
an argument about whether the payment was a gift from the community or a waste
of community assets.
Community debt is equitably allocated by the Court in the
Decree of Dissolution. However, such an allocation of community debt is not
necessarily binding on the community creditor; often, the only recourse for an
“innocent spouse” who was forced to pay a debt that the decree allocated to
their ex-spouse is to seek reimbursement from the ex-spouse.
As with marital assets, it is imperative to identify and
obtain documentation concerning the community and separate debts. The decree
should allocate the community debt as well as confirm the separate debt of each
spouse appropriately. If the decree is silent as to the allocation of a
community debt, that debt will be considered split between the parties equally,
by statute, as tenants in common. However, after the decree is issued,
documenting the status of an overlooked or unaddressed debt can be costly,
inconvenient and a daunting direction for an ex-spouse reluctant to revisit the