By Robert M. Going, Jr., Attorney
Divorce is always stressful, and when debt is involved, the process of splitting up assets and money owed can be especially tense. It’s important to know that every state differs in the way they handle the process of dividing marital property, assets, and debt. As a result, filing for divorce in a different state has a variety of consequences.
While every case is different, some commonalities apply to all types of divorces. This article explains how asset and debt distribution works in a divorce in the Keystone State.
Pennsylvania is an “Equitable Distribution” State
In Pennsylvania, the process of dividing marital assets and debts follows the laws of “equitable distribution.” Some states follow a “community property” system in which each person is entitled to half of all property regardless of what they brought into the marriage. But in the Commonwealth of Pennsylvania, laws demand more equitable solutions, so courts must work to determine fair and appropriate asset division based on a number of factors.
Equitable distribution is based on factors that can include considerations of timing. For example, if one spouse had a house prior to the marriage, that person may get to keep the house as part of the settlement. Prenuptial and postnuptial agreements may also play a factor.
The state generally classifies assets and income acquired before the marriage as personal property. Assets and income acquired during the marriage are generally considered “shared.” These assets can include homes, businesses, retirement accounts, vehicles, art, or investments. Notably, inheritances or personal gifts receive during the marriage may be exempt.
In addition to striving to take a fair view of marital assets, Pennsylvania considers debts acquired during the marriage to be shared as well.
However, couples can choose how to divide their property without the help of courts. In mediation, the couple sits down, often with lawyers, and negotiate the distribution of assets and debts. Only when couples refuse to negotiate or can’t arrive at a shared agreement do courts become involved. A skilled negotiator can help manage the process and may get their party a better settlement.
Once settlements go to a divorce court, judges have quite a bit of leeway in how they divide debt and assets. They will factor in many variables, including the length of the marriage, the age of the spouses, current income, earning potential, whether the spouses were previously married, the scope of non-marital assets, how each spouse contributed to the wealth accumulated during the marriage, assets or debts accumulated during the marriage, the standard of living established, tax consequences of any award, and custody arrangements and responsibilities. Each judge will weigh these factors differently, so spouses are often surprised or displeased by decisions.
Because Pennsylvania is an equitable distribution state, Going and Plank advise divorcing couples to make every attempt to negotiate the distribution assets and debts through mediators and attorneys. Once the case is placed in front of a judge, each spouse loses much of their negotiation power.
Spouses are Not Automatically Responsible for Debt
While debts are divided in PA, it is possible to be exempt from some types of debt. For example, if a spouse bought a vacation house before marriage, they kept the house in their name, and they are keeping the house after the divorce, it’s unlikely that the other person will be responsible for any debts associated with that home.
However, these situations can be complicated. For example, if the other person took out a loan to make improvements on that same vacation house during the marriage, that person may be responsible for some or all of the outstanding debt on that loan. This is known as commingled debt, and it’s fairly common. Many spouses have credit cards in their name before marriage, but during the marriage, they spend on shared purchases like vacations and furniture. In that case, the credit card becomes a marital debt.
Any debt under both spouses’ names will likely continue to be the responsibility of both spouses. In negotiations, couples sometimes agree to take on debt in exchange for additional assets. A skilled divorce attorney from Going and Plank can provide advice on smart tradeoffs and potentially problematic compromises.
Protection Against Unfair Debt
In some divorces, one spouse has been, intentionally or unintentionally irresponsible with finances. In these cases, both spouses suffer the effects. One spouse’s behavior can impact the other in the form of poor credit ratings, liquidations, or even bankruptcy. But some things can be done to minimize financial risk.
A good divorce lawyer provides protection by including an indemnity clause in divorce agreements. This gives the client the power to seek restitution if their spouse doesn’t hold up their end of the agreement by missing or stopping payments.
An experienced divorce lawyer can also help include refinancing or liquidation in a divorce settlement. If a client is keeping assets, refinancing is a way to get their spouse’s name off the loan. For shared assets, selling the home and splitting the proceed is often the best solution.
As soon as the divorce process begins, take the spouse’s name off all credit cards and revoke their authorization to use those cards. The same goes for bank accounts. Cancel joint credit cards and close joint bank accounts.
If a person is responsible for paying debts in their spouse’s name, their spouse must make sure that person is making timely payments. Don’t assume they will follow through. The spouse should check on the payment status of accounts or get updates on their credit report so inactivity can be flagged immediately.
Why Hire a Divorce Lawyer?
While some couples are able to divorce amicably without issue, they are the exception. Most couples argue over assets and debts, and many are unaware of their rights and options in this stressful process.
Having an experienced family law attorney will help anticipate issues, understand if settlements are fair, and help avoid big issues down the road.
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