Understanding How Your Assets are Commonly Divided in a Divorce
Divorce is the second most stressful life event a person can endure. On top of immense emotional strain, divorcing couples must juggle the fear and logistical headaches associated with dividing up their assets. Cars, houses, retirement funds—everything must be documented and distributed before the divorce can go through. How does asset division in divorce work?
What can you expect from the process? Here’s what you need to know.
How You Divorce Matters
What you can expect from the divorce process and how much control you will have over the division of your assets depends largely on what type of divorce you pursue.
If you and your spouse can work together amicably enough to pursue an uncontested or mediated divorce, you will retain almost full control over the division of your assets. With the help of your lawyers, you can negotiate a settlement outside of court that satisfies you both.
If your divorce is contentious and must go through the court system, control of your division of assets goes to the judge. Their primary focus will be on dividing assets fairly and equitably.
How Courts Divide Assets
If your divorce goes to court in Texas, there are a few key rules and guidelines that dictate asset division. These include:
- Pre- or post-nuptial agreements, if they exist
- Whether assets were acquired pre-maritally or post-maritally
- Texas Community Property laws
Other factors that can play an important role include:
- Marital debt
- Imbalances in spouses’ financial positions
- Fraud or breach of spousal fiduciary duty
Prenuptial and Post-Nuptial Agreements
In most cases, if a couple has a valid prenuptial or post-nuptial agreement in place, the court will honor it.
Such agreements may not be enforceable in all cases, however.
- Agreements not drawn up to legal standard may be null and void
- Substantial changes to the couple’s financial situation may make the agreement insufficient or inapplicable
- Changes to a couple’s health or other factors may also require modifications to the agreement during divorce proceedings
Pre-Marital and Post-Marital Assets
When no prearranged agreement exists, how are assets divided in a divorce has a great deal to do with when you acquired those assets.
Pre-marital assets acquired by one person and brought into the marriage tend to remain the property of that person in a divorce. For instance, if you purchased a car in your own name using your own money prior to your marriage, it would stay yours in the divorce.
Assets acquired during a marriage are community property. So, for example, if you and your spouse purchased a home together, the house is shared property.
It may be liquidated and the proceeds divided between you. If one of you wishes to keep the home, the other must receive shared assets of equal value in exchange.
Some exceptions apply. In particular, inheritances or financial gifts made to only one party during the marriage remain the sole property of that party in the divorce.
Texas Community Property laws
Texas is a community property state. This means that state law requires that assets acquired by a couple during their marriage be split evenly between them in a divorce. This includes:
- Real estate
- Personal property
- Bank account balances
- Retirement accounts
Premarital property and assets acquired after the couple was legally separated are not included in the couples’ shared property.
In the event that one party purchased assets during the marriage using both shared marital funds and personal funds, the portion of the asset paid for using shared funds is community property. It must be accounted for in the overall division of assets.
Real Estate and Retirement Funds
Real estate and retirement accounts can be the most difficult assets to divide cleanly. The division of a house in a divorce is particularly hotly contested in many cases.
Often, homes will be sold and the funds divided but, while this is equitable, it can lead to other challenges. Among the many financial issues to consider during divorce is the best way to handle the funds from liquidated assets so that they are not decimated by taxes and fees in the process.
Your attorney can help you identify options such as Qualified Domestic Relations Orders (QDRO) that can let you:
- Avoid heavy taxes, fees, and penalties
- Manage your financial separation wisely
- Create a solid post-divorce financial situation from which to start your new life
What happens to debt in a divorce is a question that couples often do not consider until they are sitting at the negotiating table. Like assets, debt can be complex and addressing it in divorce proceedings can be challenging.
In general, though, here is what you can expect.
Personal debt brought into the marriage by one party, such as student loans, remains the responsibility of that party.
Shared debt incurred during the marriage is community property and split evenly between both parties. This is true even when the debt is incurred in only one party’s name, such as via personal credit cards or student loans. This means that you could be liable for debt incurred by your spouse during your marriage, which comes as an unwelcome surprise to many divorcees.
Debt incurred after a couple is legally separated, however, is the sole responsibility of the incurring party. Also, if your spouse wastefully spends shared assets after you are legally separated they can be held individually accountable for that money.
As stressful as debt is, it can be a powerful negotiating tool. It is not uncommon for one spouse to agree to take on a larger portion of shared debt in return for getting other assets or terms they want in the settlement.
While Texas law generally calls for a 50/50 split of assets, exceptions can apply. This happens most often when one spouse has acted in bad faith or there are excessive differences between spouses’:
- Earning potential or employability
- Financial needs
A common example is when one spouse is highly educated and employed in a high-paying job while the other is a stay-at-home parent with limited education and work history. In such cases, asset distribution may be adjusted to compensate for the stay-at-home spouses’ lack of earning potential.
The court may also adjust asset distribution to penalize parties who attempt to fraudulently hide or transfer assets or willfully violate their spousal fiduciary duty.
Asset Division in Divorce
Asset division in divorce is complex, emotional, and often hotly contested. Done well, it can set both parties up for strong, fresh starts post-divorce. Done poorly, it can lead to disaster.
If you are getting or considering a divorce, don’t wait. Talk to an expert about how to protect your assets now.