Welcome to FreeDivorce.com.
Christina: This is Christina.
Ed: This is Ed. Today, are going to talk about the basic law concerning the division of assets and debts. We cover the division of particular assets, such as the family home, retirement assets, life insurance policies, and other assets in separate videos. We also cover the division of credit card debts and student loans in separate videos.
Christina: All divorce agreements must spell out which assets each party is going to keep and which debts each party is going to assume responsibility for paying.
Ed: We live in a community property state. Normally, when parties divorce, the community property assets and community debts are going to be divided equally in terms of value. If you own separate property, normally you will keep your separate property and your spouse will keep any separate property they may own.
Christina: What is the difference between community property and separate property?
Ed: The easiest way to understand what is community property, is to start by saying what it is not. Property that is acquired during the marriage is normally going to be community property unless it is “separate property”. So we are going to start by explaining what separate property is. There are four categories of separate property. If the property does not fall into one of the four categories of separate property, it is then going to be community property.
Christina: What are the four categories of separate property?
Ed: Separate property is going to fall into one of the four categories: 1) any property that you owned before marriage that you still own; 2) Any property you still own that you inherited; 3) any property that you still own that was gifted to you (by your spouse or by anyone else); and 4) property you acquired after the date of separation.
Christina: What about rents or profits generated by the separate property, are they also separate property?
Ed: Yes. Separate property also includes any rents or profits generated by the separate property. For example, if you entered the marriage with $100,000 certificate of deposit, the interest that the certificate earns is also going to be your separate property. If you entered the marriage owning a rental house that is your separate property because you owned it before marriage, the net rental income generated by the home would be your separate property.
Christina: What if I came into the marriage with separate property funds, but spent the funds during the marriage?
Ed: If you used your separate property funds to acquire an asset during the marriage, the new asset can be separate property. For example, if you came into the marriage with $20,000 in your savings account and then used that separate property money during the marriage to purchase a car, the car would be your separate property. You just have to trace or prove that the original $20,000 was used to purchase of the car and that the car was not purchased with community funds.
Christina: What if I inherited $20,000 during the marriage and used that money to buy a new car, would the car be my separate property?
Ed: Yes. It’s the same as the example I just mentioned. If you inherited $20,000, the $20,000 would be your separate property because it is an inheritance. If you use the same $20,000 to buy a car, the car will by your separate property.
Christina: What if I come into the marriage with $20,000 of the separate funds that I earned before marriage, and during the marriage, I spent the $20,000, not on an asset, but to pay for groceries, utilities or to go on a vacation?
Ed: Then, the money is gone. There is no existing separate property asset that you can trace the money to and so there is no longer any separate property asset.
Christina: What about a gift? What if my parents gifted me $50,000 during the marriage to use as a down payment on a house?
Ed: As I mentioned, gifts are one of the four categories of separate property. The $50,000 would be your separate property and you would have a right to be reimbursed for the $50,000 upon sale of the house. I’m assuming the gift was made to just you, and not to you and your spouse. If the $50,000 check from your parents was written to you and your spouse, it would likely be community property and not your separate property.
Christina: What about wedding gifts? Our wedding gifts from my family my separate property?
Ed: No. Wedding gifts are gifts to both of you and are community property. It does not matter whose side of the family made the gift.
Christina: To summarize, separate property is property acquired before the marriage; property acquired by gift; property that is inherited; and property acquired after the date of separation. If it does not fall into one of those four categories, then it is likely community property.
Christina: What about debt? Are there such things as community debt and separate debt?
Ed: Yes. Separate debt is debt that was incurred prior to marriage. For example, if you borrowed $10,000 from your parents before the date of marriage and never paid it back, upon a divorce, that pre-marriage debt would be your separate debt and would be assigned to you. Debt that is incurred during the marriage is generally community debt, but there can be exceptions. If you and your spouse separate and then divorce, debt that is incurred after you and your spouse separated is separate debt. For example, if a husband and wife separate, and the wife then runs up a big credit card bill buying a completely new wardrobe, the wardrobe will be her separate property because it is an asset she acquired after the date of separation. However, the post-separation credit card charges made to buy the wardrobe will also be her separate debt.
Christina: Upon a divorce, the separate property goes to the person that owns that separate property, and separate debt is assigned to the person that owes that debt. Are community property and community debt then always equally divided?
Ed: Typically, when a couple gets divorced, the parties are going to divide their community assets and community debts equally. In a contested case, the court is going to try to divide the community assets and the community debts equally. However, in an uncontested case, where you are negotiating a property settlement agreement with your spouse, assets and debts do not have to be divided equally. You are both adults. If you want to agree to a lopsided property division, the court will approve that division. Parties to a divorce are free to divide their assets and debts in any way they want, even a lopsided division.
Christina: The division of assets and debts can be simple if you and your spouse don’t own much and don’t have much debt. However, if you own a home, have an interest in retirement benefits, own a business, or own other valuable assets, there can be exceedingly complex issues that you must take into consideration before starting settlement discussions. You can watch some of the other “Getting Educated” videos that cover these assets.
Ed: We also have a separate video on reimbursement claims. Reimbursement claims are oftentimes related to the division of assets and debts. As I mentioned earlier, if you use your separate property funds for the down payment when the family home was purchased, you will have a separate property reimbursement claim that needs to be taken into consideration when you and your spouse discuss how to divide the equity in the family home.