Asset and debt division can be one of the most overwhelming and frustrating aspects of divorce proceedings for both spouses.
Navigating the division of assets AND debts can be one of the largest legal hurdles for divorcing spouses. Dasha Kennedy, a divorced mother and financial education activist, shared with Fortune Magazine in a recently published article that during her own divorce she went from having no debt to accruing over $20,000 in debt. It all happened within a matter of months during divorce proceedings while the courts debated the division of assets and debts between her and her former spouse. “It’s hell,” she emphasized when recounting her financial challenges during her divorce. At the end of the day, statistics indicate that while both spouses usually experience a negative impact on their household income after a divorce, you can help mitigate the ill effects when preparing for divorce by collecting your pertinent financial documents for your attorney and developing a strategy for handling the five most common financial challenges you may encounter during a divorce.
Challenge 1: Determining What Is Community Property in Texas
One of the most common challenges during divorce proceedings is the process of accurately determining what is community property. Texas is considered a community property state, which means that except for a few exceptions, most income, property, and debts acquired by a couple during their marriage are classified as joint property and can be divided equally in the event of a divorce. The concept behind community property is that because both spouses are viewed as equal partners in a marriage, they should then share equally in the division of assets and debts that were acquired during the marriage. This means that each spouse has a 50% ownership interest in all community property, regardless of who earned the income or made the purchase.
Community Property Examples Under Texas Law
- Wages (including salaries, tips, and overtime) earned by either spouse
- Real estate purchased with those wages
- Debts incurred during the marriage by either spouse
- The balance of 401ks, savings accounts, and other investment accounts regardless of whether they are single or joint accounts
- Vehicles purchased during the marriage regardless of the name on the title
- Unemployment compensation
- Business equity
This is not an exhaustive list, but provides a rough outline of what types of assets and debts will be split in your final divorce settlement agreement. Examples of separate (non community) property include a spouse’s family inheritance and/or any jewelry items, such as a wedding ring, that were given by one spouse to the other.
Challenge 2: Dividing Complex Assets & Debts
Many couples also have more complex assets and debts that have to be evaluated on their own unique merit before they can be classified as community or separate property.
Complex Property Examples Under Texas Law
Assets that commonly lead to complex issues of classification include:
- Business ownership also known as “closely held businesses”
- Retirement accounts and pensions
- Assets held in trust
- Deferred compensation
- Executive bonuses
In addition, couples with a high net worth and/or separate properties or inheritances that have been co-mingled since the start of the marriage face a more complicated asset and liability valuation and division process.
Challenge 3: Valuating Closely Held Businesses
One of the most challenging legal nuances for divorcing couples is how to divide a jointly-owned “Closely Held Business.”
Note: A Closely Held Business refers to any recognized business entity including ‘C’ Corporations, ‘S’ Corporations, Limited Partnerships, Sole Proprietorships, and Limited Liability Companies (LLC).
If you and your spouse own a closely held business, a business appraiser or other specialized professional will need to perform a full assessment of the combined revenue, assets, and other factors of value involved in the business, as well as an evaluation of what percentage of the business each spouse owns if the shares are not determined to be equal.
While every situation is unique, there are three common ways of dividing a business during divorce:
Unless the divorce is amicable, co-ownership between divorced spouses can make for a challenging business ownership experience in the future. If you want to go this route, carefully evaluate first whether you will be able to successfully and professionally continue to operate a business with your ex after the divorce is finalized.
Selling the Business and Splitting the Profits-
Because of the multitude of asset division possibilities in this scenario, you will need to consult with financial experts and your family lawyer each step of the way. Both sides will need to reach an agreement that they feel is equitable.
Buy Out the Other Spouse’s Interest-
The advantages to buying out your spouse’s interest will depend (once again) upon your circumstances. With the guidance of your legal team, you can in some scenarios even use other assets to offset the difference of a business purchase. For example, you may be able to give up a portion of equity on a house or other asset in exchange for a larger share of the business.
Challenge 4: Protecting Against the Dissipation of Assets
According to an informative article by Forbes Magazine online, “dissipation of assets” during a divorce refers to the intentional use of marital property by one spouse to deprive the other spouse of their equitable share of financial assets before a settlement agreement can be reached.
If the divorce is amicable, then hopefully you can avoid this situation entirely. However, by understanding what is involved in the dissipation of assets, you can prepare for potential scenarios during your divorce when both emotions and poor judgment tend to run high.
Examples of Dissipation of Assets During Divorce
Dissipation of assets during divorce isn’t always obvious, which is why you need to begin documenting and tracking your finances as early as possible, so you are aware of any unusual activity.
Beyond the obvious examples of one spouse purchasing a new sports car or booking a lavish destination vacation, the dissipation of assets also refers to any financial decision involving community property that puts one spouse at a financial disadvantage without consulting the other spouse first. According to Texas Family Code Sec. 7.009, the dissipation of assets by either spouse is considered “community fraud” during divorce proceedings and there are multiple legal ramifications.
Challenge 5: Discovering Hidden Assets
Unfortunately, one spouse may hide assets before a divorce is finalized in order to keep community property out of the hands of the other spouse. According to a DivorceNet article, “If you don’t think your spouse will voluntarily disclose all financial information in your divorce, you or your attorney will need to use a formal, legal process to get information and documents. Attorneys and judges refer to this as the ‘discovery process.'”
The discovery process can include what is known as forensic accounting. In the context of divorce division of assets, forensic accounting is the in-depth investigative analysis of finances (either that of an individual or business) by employing the use of software and other applications to track down even the most obscure financial details.
If you believe you’ll need a forensic accountant for your divorce, consult with your lawyer first. A family law attorney can guide you through a discussion about your financial details, concerns, and why you may need forensic accounting based on your specific circumstances.
Get the Legal Support You Need to Guide Your Equitable Divorce Division of Assets
Kelly J. Capps offers 28+ years of experience in protecting the rights of our clients going through a Texas divorce involving complex property valuation and equitable asset division. The legal team at Capps Law Firm, PLLC, is driven to find the best way to move forward for clients.
If you would like to discuss your family law matter and the implications of how your finances might be impacted by the division of assets during a divorce, contact our office or call our office at (512) 338-9800.