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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"

John McKindles

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Mesa Arizona Divorce Attorney John McKindles

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.

Exceptions. With 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 courtroom.