Common Financial Issues in a Divorce

No one gets married expecting their marriage to fail; for most people, marriage is for a lifetime. However, insurmountable differences may arise in your marriage, making divorce the only option. Apart from being emotionally draining, divorce is also financially draining. Both you and your partner have to make some major financial decisions that may have a great impact on both your current and future financial situations. San Diego Family Law Attorney can successfully guide you through the process of divorce and help you make some major financial decisions.

Some of the common financial issues in a divorce include the following.

Property Division

In the face of divorce, one of the main issues entails dividing property between the two parties. California is among the nine states in the United States that recognize and practice community property law. The community property law considers both partners as equal co-owners of all the assets and property acquired during the marriage. You have to understand the various types of properties to help you understand the art of property division during divorce.

The California law classifies property for married people under three categories: community property, quasi-community property, and separate property. The division of property after marriage will depend on the classification of the property.

Community property - All the property that a couple may have acquired during their marriage and while domiciled in California fall under community property. Community property includes all types of property, both personal and real. Your partner is entitled to half of all your monetary proceeds as long as the proceeds are not from your separate property. It is important to note that even if you have some earnings in a separate account under your name, as long as the earnings were derived from communal property, your spouse is entitled to half of it. 

Quasi-Community Property - Any property you may have acquired in another state other than California falls under quasi-community property. For purposes of division of property during a divorce, the quasi-community property is treated as a community property despite its distinct classification. 

Separate Property - During divorce proceedings, you can keep any property acquired before marriage or after the divorce process. If you receive any property as a gift or as an inheritance during the marriage, the property will fall under the separate property. In the case of divorce, you will get to keep it.

Other than following the community property law, there are different ways of dividing property during divorce. For instance, a couple may amicably decide on how to divide the marital property. If the couple agrees on how to divide property, the divorce proceedings can be much easier.

If partners disagree on how to divide marital property, they may adopt the bartering method whereby as one partner takes a particular item, the other partner takes another. For instance, the wife may take the house while the husband takes the vehicle.

A couple may also decide to sell all their property and equally divide the proceeds of the sales.  In deciding how to divide property during a divorce, couples often seek the services of mediators or arbitrators. It is always good to understand the laws that govern the division of property before the divorce as this will help your claim your deserved property. 

What If a Property Cannot Be Split?

While applying the community property law, you may wonder how the law treats marital property that is hard to split into equal shares. For instance, if a couple owns a family home, how can you split the home into two? In such a scenario, the law outlines that each party should get half the market value of the marital property. The court values and distributes each item on a case-to-case basis.

In handling significant marital assets, including vehicles and houses, the court ensures that each party gets an equal share at the end of the process. For example, if one party gets a motor vehicle valued at $ 30,000 and the other party gets a house valued at $70,000, the later spouse has to equalize a payment of $20,000 to ensure both spouses are at par.

The community property law aims at creating a clean break between spouses by ensuring that after a divorce, joint property ownership ceases to exist, and each spouse is free to walk away and lead an independent life.  The court may consider some mitigating factors when making decisions regarding the division of property. For instance, the court may consider the welfare of the children. In some rare cases, the court may consider the sentimental value a partner attaches to a certain property. 

1. Dividing Debts in Divorce

It is much more challenging to divide debts during divorce than to divide the property. It may be hard to determine which party should take responsibility for the debt that the couple may have accumulated during the marriage.

It would be wise to know your debt situation before the divorce proceedings. Ensure that you obtain your credit report as this will help you know the exact amount of your separate debts and also debts on joint accounts with your partner.  Classify all the debts as either shared or as separate debts under your name or separate debts under your spouse's name.

As you anticipate the divorce proceedings, it is advisable to avoid accruing more debt. You can prevent further debt accrual by canceling joint credit cards. 

There are various ways of handling debt during divorce:

• You may agree to take up all the debts, and in exchange, you receive a higher share of the marital property during the property division proceedings
• You may allow your partner to take up all the debts and then surrender more assets to him/her during the divorce
• You may agree to divide and pay the outstanding debts equally. Most people may consider this option the most viable and fair. However, if your spouse refuses to honor their end of the bargain, you may end up paying all the debts on your own. Even if your partner signs an agreement and commits him/herself to pay the debts, you will still be responsible if they do not pay. 
• You may also opt to pay the debts you are responsible for before finalizing the If you have some adequate assets or some savings, you may opt to pay off some debts as this will enable you to enjoy a seamless divorce process.  You will be able to start your life after divorce free of debts. 
• If neither you nor your spouse can pay off the existing debts, you may consider selling some marital property to clear the debts
• If you suspect that your partner is likely to turn against you after the divorce and refuse to meet some debts, insist on having all the debts cleared before finalizing the divorce process

2. Tax Issues in Divorce

Most people concentrate on the typical issues of divorce, such as child custody and alimony, and forget other common financial issues like the tax implications of divorce.  The tax could cost you or save you thousands of dollars depending on the plans you make during the divorce

Common tax issues may include determining which party will enjoy tax exemptions for dependents. You also have to decide who will get the Head of Household status. If you separate with your spouse before the end of a calendar year, you may file your income taxes as head of the household. This can save you a lot of income, as you would be able to take advantage of lower tax rates and higher standard deductions.

Considering and planning tax issues will also help you determine which attorney fees are tax-deductible. You are also able to establish whether maintenance fees are tax-deductible. Expenses such as child support should also be tax-deductible.

Tax laws are constantly evolving, and the tax issues affecting a divorce may vary from case to case or from state to state. It is always important to consult an attorney to help you understand the tax implications of your divorce.

3. Retirement Schemes Issues

Other than a home, retirement savings such as IRA and pension plans are the most treasured assets in a divorce.  According to California law, if your spouse has retirement savings, you may be entitled to a half of the savings. You may use this money for a wide range of uses, including meeting your current and future expenses, relocation expenses, or for your retirement. However, you have to tread carefully to avoid penalties that may come with making an early withdrawal.  Early withdrawal of the savings may have some adverse tax repercussions. You can take advantage of some federal provisions that allow divorce parties to divide benefits from retirement plans without incurring some tax penalties.

The Employment Retirement Income Security Act of 1974 (ERISA) provides a legal tool that gives the state court a mandate to divide any qualifying pension plan or savings plan benefits between spouses. This tool is referred to as a Qualified Domestic Relations Order (QDRO). For a QDRO to go into effect, certain information is necessary, including the general identity information of the parties involved in the divorce. The identity information may include the social security numbers of both spouses, the dates of birth of the spouses, and the addresses of the spouses. Also necessary for the QDRO to go into effect is an outline of the retirement plan's guidelines. 

Some spouses may choose to have one party retain the retirement plan, and savings plan benefits and compensate the other party by allocating some extra assets.  However, in some instances, it is hard to determine how much a retirement plan is worth to compensate for the other client. 

Most defined benefit plans pay a certain sum of money to the beneficiary from the time the beneficiary retires up to the time that he/she passes on. It is therefore hard to determine the value of a benefit plan as it is dependent on the life expectancy of the beneficiary. How can you tell how long the other party will live? You have to involve an expert who can assist you in making the necessary calculations to make an accurate evaluation of a retirement plan. 

4.  Bankruptcy

Bankruptcy can make a divorce process much more complicated. Upon splitting up, one party may be unable to pay debts, meet other obligations, and opt to file for bankruptcy to escape the hefty financial burden. Bankruptcy issues in divorce may affect several areas:

• After filing for bankruptcy, your partner may stop paying child support or alimony (spousal support)
• Filing for bankruptcy may affect the process of enforcing the property settlement agreement after divorce
• If only one party files for bankruptcy, it may affect the payment of joint debts, especially credit card debts

The only good thing is that currently, the California Bankruptcy Code Section 523(a)(5) states that all support obligations cannot be discharged under any chapter of bankruptcy.

However, if after divorce your ex-spouse files for bankruptcy and both of you were repaying a joint debt, the bankruptcy court may release your spouse from owing the debt. However, even if the court releases the other spouse from repaying the debt, the lender still has your contacts and may shift the entire debt to you. 

If you find yourself in a place where you are responsible for the entire joint debt after your ex-spouse files for bankruptcy, you may also opt to file for bankruptcy to escape the debt. You may also opt to pay up the entire debt. You may also decide to ignore the debt though this would hurt your credit history.  A family law attorney can help you structure your divorce accordingly to prevent such scenarios from happening. 

A bankruptcy filing may turn a divorce process into a total mess. In divorce cases, there are no clear winners or losers. Therefore, it is for the best interest of both parties to work together for the common good. Both parties should aim at reaching a suitable property settlement agreement. For instance, both parties may agree to for bankruptcy jointly, as this would release both parties from debt without shifting the debt burden to one person. 

5. Adversary Complaint

During a divorce, if one party files for bankruptcy, the other party can respond by filing an adversary complaint. However, under California law, it is not necessary to file an adversary complaint to block a debtor ex-spouse to file for bankruptcy and evade debt owed under the property settlement agreement. Currently, the California Bankruptcy Code Section 523(a)(5) does not allow discharging of support obligations. Also, under chapter 7 bankruptcy, it is not allowable to discharge all settlement debts owed to your spouse or ex-spouse. However, to be completely sure that the debtor spouse will not discharge marital debts outlined in the settlement agreement, it may still be important to file an adversary complaint.

6. Negative Value Assets

At times, marital property, including houses and vehicles, may have outstanding loans attached to them. In some instances, real estate, and vehicles may lose value much faster than their loan can be repaid. In handling negative value assets, the parties may agree to let the person receiving the asset receives its loan as well. In some other instances, the parties may agree to sell the asset and split the proceeds between the spouses. The terms of the settlement agreements determine how spouses treat negative value assets.

7. Attorney Fees

It is common for a divorce process to turn into a war of attrition. For instance, the court may decide to have one spouse pay the attorney fees for the other party. In most cases, the husband pays the attorney fees for the wife. This could have a great toll on the paying party's financial position and morale. In getting back at their wives after divorce, husbands may file for bankruptcy and in the list of debts; include their wives' attorney fees. 

Hot debate surrounds the discharge of attorney fees in bankruptcy. Should attorney fees count as support obligation or as a property settlement claim?  A wife can file an adversary complaint in court if her ex-husband tries to file for bankruptcy before clearing the allocated attorney fees.  Ignoring your ex-spouse's bankruptcy filing could substantially cost you, and failing to object means that your ex-spouse may discharge a wide range of joint debts. This would leave the burden of dealing with creditors to you.  

Hire a Divorce Expert Near Me

Divorce is a process that can bring out the worst in people. A seemingly good partner may turn into a different person in the face of divorce.  Your partner may employ a wide range of tactics, including requesting his/her employer to delay their salary or work bonus. Your partner may also under-report their income to minimize your gain from the divorce. The San Diego Family Law Attorney can help you prepare for divorce and identify all the loopholes your spouse may utilize to deny you your entitlement. You particularly need legal counsel if you and your partner cannot agree on an amicable settlement.  Contact our San Diego divorce lawyer at 619-610-7425 and speak to an attorney today.