Couples going through a divorce must decide how to divide their property and debts—or ask a court to do it for them. Under California’s community property laws, assets and debts spouses acquire during marriage belong equally to both of them, and they must divide them equally in divorce. Some couples are able to agree on how to divide all their property and debts. Couples who can’t manage this will end up going to court to ask for a decision from an arbitrator or a judge.
Whether you handle your own property division or a court handles it for you, there are three crucial steps to the process:
- determine whether the property (or debt) is marital or separate
- agree on a value for marital property, and
- decide how to divide the property.
Community Property and Separate Property
There is a strong presumption under California law that assets and debts a couple accumulates during marriage are community property. Property one spouse owned alone before the marriage, or acquired by gift or inheritance during the marriage, is that spouse’s separate property. Separate property also generally includes items purchased with or exchanged for separate property, earnings on separate property, and any increase in value of separate property, as long as the property owner can prove the claim with financial records or other documents.
California law also provides that property spouses acquire before divorce but after the date of separation is separate property. The date of separation is not necessarily the date one spouse moves out of the marital home. Instead, it is the date that one spouse decides to end the marriage, and it requires some act of physical separation combined with other actions clearly demonstrating that the spouse has decided to end the marriage.
The date of separation can become a big issue if just before the divorce one spouse either earned an unusual amount of money—got a large bonus at work or won the lottery, for example—or spent a significant amount of money. If the couple can’t agree on a date, a court will decide after considering all of the evidence. Courts usually lean toward later rather than earlier dates when evidence conflicts, so that more property is included as community property, rather than less.
A couple can agree either before or during marriage to change an asset that was originally separate property into community property, or vice versa. Such agreements must be in writing and must clearly state the intentions of the parties; simply changing the title of the property is not enough.
Sometimes a spouse changes a separate asset into a community asset without meaning to by combining—or “commingling”—separate property with marital property. A premarital bank account belonging to one spouse can become marital property if the other spouse makes deposits to it; a house owned by one spouse alone can become marital property (either in whole or in part) if both spouses pay the mortgage and other expenses.
Many types of assets can be partially community and partially separate, including retirement accounts one spouse contributed to both before and after the marriage, or a business one spouse started before marriage and continued operating after marriage.
Distinguishing community property from separate property can become very complicated, especially if one spouse owns a business or other asset to which the other contributed labor or funds during the marriage. If you have a complex property situation, you may need to consult an attorney for advice. Spouses who can’t decide what belongs to whom will have to let a court decide whether commingled property was a gift to the marriage or whether the original owner should be reimbursed in whole or in part.
Learn more about California Community Property.
Determining Property Value
The spouses—or the court if they can’t agree – generally assign a monetary value to each item of property. Appraisals can help a couple determine the value of real property as well as items like antiques or artwork. Retirement assets can be very difficult to evaluate and may require the assistance of an actuary, C.P.A., or other financial professional.
Dividing the Property
Spouses can divide assets by assigning certain items to each spouse, by allowing one spouse to “buy out” the other’s share of an asset, or by selling assets and dividing the proceeds. They can also agree to hold property together even after the divorce. Although continuing to hold property together isn’t a very attractive option for most people, since it requires a continued financial relationship, some couples agree to keep a family home until children are out of school. Others may keep investment property, hoping that it will increase in value.
The couple must also assign all debts accrued during the marriage, including mortgages, car loans, and credit card debts, to one of the spouses. Couples dividing debts should be aware that their separation agreement or divorce order is not binding on creditors, who may continue trying to collect a community debt from either spouse. If a debt is assigned to one spouse, the other can ask the court to put a lien on that spouse’s separate property as security for payment of the debt. However, it’s a better practice to try to pay off all the marital debts when the divorce is finalized—if you are selling the family home or one spouse is buying the other out, there’s often a refinancing of the house loan that provides an opportunity to do this.