The average American family carries around $150,000 in debt. But, if you have recently purchased a home, have school loans or medical debt, or are a member of a high-income family, your total household debt could be much higher.
If you have debt, how will this impact the divorce process?
Arizona’s Community Property Law Governs Debt Division
Generally speaking, the division of debts is subject to the same basic rules as the division of property. This means that divorcing spouses must divide their debts by Arizona’s community property law.
Arizona’s community property law requires divorcing spouses to divide their assets and debts equally in most cases. There are only a handful of instances in which something other than a 50-50 split will be warranted (this is different from the law in many other states, where spouses must divide their assets “equitably” but not necessarily equally).
Importantly, Arizona’s community property law only applies to a couple’s “marital” debts. If either spouse has “separate” debts, these debts will generally remain with the indebted spouse post-divorce.
Identifying Your “Separate” and “Marital” Debts
The basic rule is that a debt is considered “marital” if it was incurred during the couple’s marriage, while debt is considered “separate” if either spouse brought the debt into the marriage from the start. For example, if a couple buys their first home after getting married, the mortgage would generally be considered marital debt. Conversely, if one spouse has outstanding school loans on the date of the couple’s marriage, these loans are that spouse’s separate debt.
The first step toward dividing your debts in your divorce is determining which of your debts are marital and separate. Just like your assets, it is critical to ensure that you identify all debts that are subject to division in your divorce. Some of the most common types of household debts include:
- Mortgages
- Car Loans
- School Loans
- Personal Loans
- Credit Card Debt
- Medical Debt
- Personally-Guaranteed Business Loans
It is a good idea to make a list of all of your debts, taking note of which debts you believe are (i) marital debts, (ii) your separate debts, and (iii) your spouse’s separate debts. Your divorce attorney can help confirm whether you have classified your debts correctly. It is a good idea to go ahead and compile copies of your loan documents and the most-recent account statements as well.
As mentioned above, it is important to be comprehensive when listing your debts for purposes of your divorce. If you overlook any marital debts—and if your spouse overlooks them too—this will leave important questions unresolved when your divorce is final. If you are not entirely sure what debts you have, you can review your monthly bank account statements to see what payments you are making, and you will want to pay close attention to your mail to ensure you do not overlook any statements you receive. Your divorce attorney can help here as well, although his or her ability to help will be limited based on the information you can provide.
Options for Dividing Debts in an Arizona Divorce
Couples have several options when it comes to splitting debts in a divorce under Arizona law. While a 50-50 split is required in most cases, divorcing spouses can achieve this in various ways. For example:
1. Distributing Debts Equally
One option is to distribute the couple’s debts equally. For example, let’s say a couple has two credit cards, each with an outstanding balance of $5,000. In this scenario, the simplest option may simply be to distribute one card’s debt to each spouse.
Note that this would be necessary even if one (or both) credit cards are in one spouse’s name. Arizona’s community property law focuses on the time a debt was incurred, not which spouse’s name is on the paperwork. If either spouse incurs a debt—individually or jointly—during the marriage, the debt counts as “marital” under Arizona law.
2. Addressing Assets and Debts Together
Another option is to address assets and debts together. With this approach, divorcing spouses work toward an overall 50-50 split of their assets and debts. One spouse may assume a greater percentage of the couple’s debt, and in exchange for doing so, he or she will also receive a greater percentage of the couple’s marital property.
For example, let’s say you and your spouse have a house worth $500,000 with a $400,000 mortgage. Let’s say you also have an investment account worth $100,000. In this scenario, you and your spouse could potentially achieve a 50-50 split by distributing the house and mortgage to one spouse (with $100,000 in equity), with the other spouse taking sole ownership of the $100,000 investment account.
It is fairly common for the spouse who receives a secured asset (i.e., a house with a mortgage) to also take responsibility for the underlying debt. But, this can present challenges to lender approval in some cases, and it is important not to assume that this is the best approach in all cases.
3. Paying Off Debts During the Divorce Process
A third option is to use the divorce process as an opportunity to pay off some of your debts. If you and your spouse use marital assets to pay off marital debts, this can simplify the divorce process and improve your monthly cash flow. Of course, you and your spouse must both agree to this approach, and you must have the assets available to pay off the debts you wish to eliminate during your divorce.
Request a Free Consultation with Phoenix Divorce Lawyer Adam Weingart
If you are contemplating a divorce and need to know more about the process of dividing your marital debts, we encourage you to contact us for a free, no-obligation consultation. To speak with Phoenix divorce lawyer Adam Weingart confidently, please call 480-542-0099 or request an appointment online today.