How to Divide Assets and Debts in a Divorce
Nuts and Bolts: Separating Debts and Assets in Divorce
One of the biggest anxieties that people face when they go into a divorce is not knowing what is going to happen. Personally, I am a planner and I want to know everything that will happen and when. So I get it, the unknown is scary. One of our main goals is to answer your questions so that you understand your options and feel more at peace. CONTACT US for a low-cost consultation to learn more about how your division may work.
It makes it even harder when your lawyer can’t give you any guidance on what to expect for several months into the process. Before we can give you any guidance on how your assets and debts might be divided we have to have the financial disclosures. It takes about 6 weeks for us to get those from you, and from your spouse, and then process them. Only then do we have an idea of what is in there and can provide you with guidance.
However, we can tell you the method that we use to divide assets and debts in your divorce. Keep reading to learn more about how we help make sure that your division is fair.
Colorado is an “equitable division” state. That means that the division between the spouses has to be fair, but not necessarily equal. I personally prefer this rule for many reasons.
1.“Equal division” (50/50) can lead to divisions that are not practical. For example, someone may have to take on debt that they can’t afford.
2. Equitable division allows us to have “maintenance buyouts”. That is where one person gives the other person more cash up front instead of paying maintenance (alimony) for years.
3. Balance debts and assets: with equitable division one person may keep more assets, but they also keep more debts, so that the division is still 50/50 in the end. However, the person with more ability to pay keeps the debts.
This is all nice in theory, but how does it look in practice? Below are some examples of (simplistic) divisions to demonstrate the idea.
Example 1: Equal Division
Pat and Jan have a house, some credit cards, and some cash accounts. There is a mortgage on the house, and it also has some equity. In this first example, they sell the house and equally divide the proceeds. They also equally divide most of the accounts and debts. As you can see in the spreadsheet below, with the example here, Pat would owe Jan $2500 to make everything equal.
Example 2: Equitable Division—Jan keeps the house
That couple didn’t have to sell the house. It’s often beneficial to the family to have one person keep the house. In that case, they get credit for the equity in the house, and have to buy out the other party. In the example below, Jan keeps the house, but also keeps more of the debt. Pat keeps more of the cash assets. Even with that division, Jan still has to pay Pat $62,500 so that they have an equitable division. The difference with the equal division is that each got what they wanted: Jan wanted the house and Pat wants cash.
Retirement—A Different Story
You’ll note that I did not include retirement in these charts. That is because retirement accounts have a different tax structure, and so should not be balanced against cash accounts. Watch for a future blog about division of retirement accounts.
Do you still have questions? CONTACT US for a low-cost consultation with an attorney to learn more about how we can help you.
