How The Courts Divide Assets and Obligations in a Divorce

How do courts divide property when the spouses cannot agree? They basically follow one of two approaches:

1. Equitable Distribution

In an equitable distribution state, the court "equitably divides" the marital property. The court normally considers the length of the marriage and the age, health, conduct, occupation, skills, and employment of the parties. Equitable division does not mean equal division. Seldom is property equally divided.

With equitable distribution, all property acquired during the marriage is "marital property" and all property owned before the marriage is "non-marital property." Gifts or inheritances to either spouse during the marriage are also non-marital property. This does not mean non-marital property is safe in a divorce. The court may leave this property with the respective spouses, but courts in most equitable distribution states apportion these assets between spouses as they do with marital property. In fact, one purpose of a pre-marriage agreement is to keep separate the couple's pre-marriage assets.

The following are equitable distribution states, by either statute or common law: Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, and Wyoming.

2. Community Property

Community property states, in contrast, require equal division of the community property in the event of divorce. This includes property acquired by each spouse prior to the marriage, as well as property acquired thereafter.

There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

To understand the theory of asset division in community property states, you must first understand that community property states view marriage as an equal business partnership. The law then divides property into two categories: community property and separate property. Community property is anything acquired jointly, or by either spouse, during the marriage. Separate property is from one of two sources:

1. Property that each spouse owned individually before the marriage and retained in his/her name after the marriage.

2. Property that each spouse received as a gift or inheritance either before or during the marriage.

Each spouse's separate property remains separate property and is not subject to division upon divorce. If you exchange one item of separate property for another, the new property continues as separate property. So, too, if the proceeds of sale of separate property are used to acquire new property. For example, if your wife inherited a car from her aunt, sold it, and bought another one with the proceeds, the new car would be considered separate property. Caution: If you commingle separate property with joint property (e.g., deposit separate property in a shared bank account), the separate property becomes joint property subject to division.

When dividing real estate personal property items (as opposed to funds), you have two alternatives:

  • Sell the property now and split the proceeds.
  • Have one spouse buy out the interest of the other.

Note on real estate: It is important to remember that in regards to real estate, you are dealing with the equity in the property, not its fair market value. If a house is worth $200,000 but has a $150,000 mortgage, then the equity shared by you and your spouse is only $50,000. It is the equity amount you must focus on when negotiating your settlement.