Debt and Divorce in Arizona
When a married couple proceeds with divorce, there are several sensitive matters to address. Those commonly mentioned are child custody and visitation arrangements, division of property, and the division of assets. However, these are not the only important financial considerations during a divorce. Just as important is the process of assessing the debts the couple is responsible for and determining how they will be assigned after the divorce.
Once divorce proceedings are underway, many couples come to the realization that assigning debt responsibilities is every bit as complex, if not more so, than dividing real property and assets. Just as each party involved in a divorce may lay claim to equity accrued in property holdings or retirement accounts, both may feel debts identified in the proceedings should be the responsibility of the other party.
How Is Debt Divided in Arizona Divorce?
Arizona is a “community property state.” That means anything acquired by a couple during their marriage is equally owned by both partners. During a divorce, community property is calculated, placed in a single pool, and divided equally. Community property can include tangible property like homes, cars, and televisions, assets like bank and retirement accounts, and other investments.
Community property is also wide-reaching. For example, even if one partner contributed the funds to purchase a car or home and only their name is on the deed, it is still considered community property. The same goes for debts.
If a married couple purchases property and takes on debt in other states, even states that don’t have community law divorce statutes, Arizona will adjudicate those holdings as if they were in Arizona. This is called quasi-community property.
Secured debt like mortgages and car payments, as well as unsecured debt like credit card accounts, becomes an equal responsibility of both partners in a divorce. Even if both partners maintain their own credit cards and make payments from their own checking accounts, both the debt on the cards and the money in the checking accounts is divided during the divorce.
However, just because all community property and community debts are pooled together during divorce doesn’t necessarily mean each individual asset or obligation must be split evenly. For example, an agreement during negotiations or mediation could dictate that one partner wants to keep the home and thus will take on a greater share or the full obligation of the mortgage. Without such an agreement, the court will act to divide both property and debt in the most equitable manner between the couple.
What Is Classed as Marital Debt in AZ?
Any debts incurred during the marriage are subject to becoming marital debt, and subject to division under community property statutes. These “matrimonial” debts may include loans for making improvements to the family home, family holidays, or purchasing family cars. This is one of many reasons debt can be complex to sort out at the time of divorce. Thorough and accurate record keeping is necessary to account for what debt falls within the duration of the marriage and what debt predated it.
For this determination, the help of a Phoenix-based attorney well-versed in Arizona divorce law is critical. Each state has its own policies for determining how to split assets and debt. As a result, if you got married in another state or just moved to Arizona, you’ll want to make sure to have an expert on your side who can help you understand Arizona’s unique laws.
Does Your Spouse’s Debt Become Yours After Divorce?
So, what happens to a couple’s debt when they divorce in AZ? If the debt is marital, it will be divided based on the community property rules defined above. Even if you do not believe the debt should belong to you, if the debt was incurred after the marriage began, it is community debt. Debts incurred prior to the marriage are considered separate debt, so be mindful of any individual debt you accrue on behalf of your partner in advance of the marriage, such as prepaying wedding expenses. This debt may unexpectedly remain your separate debt in Arizona, even though it benefited you both at the time.
If the marriage lasted for any significant amount of time, there are likely debts bearing both spouses’ names. This is considered joint debt. If that debt goes into default, the lender could sue both parties to recoup the money, even after they have separated and divorced.
Community debt that has only one partner’s name associated with it, like a credit card, is more complex. While the creditor for that account is most likely to sue the original customer who opened the account, liability could extend to the other partner under community property law. As the creditors are not considered parties in the divorce or any agreements made during the divorce, Arizona community law statutes include recommended steps for seeking account information from creditors to avoid the negative impact of debts remaining unpaid.
For this reason, knowing the bankruptcy status of a former spouse is important if you still have joint debt or community debt you remain partially responsible for paying. While an ongoing Chapter 13 bankruptcy by a former spouse should have little to no impact on your financial circumstances, if the case is dismissed or your former spouse files for Chapter 7 bankruptcy, you may face creditors attempting to request the payment balance from you. The terms of your divorce do not restrict their ability to seek payment.
In most cases. community debt stops accruing once the divorce petition is served by one partner on the other. If one spouse or the other pays for repair or refurbishment of community property as part of the divorce, those costs may be sought as community debt and the couple will split the cost.
The Exceptions Under Which a Spouse Can Challenge Community Debt
For example, if one spouse opened a credit card without telling the other spouse and used the line of credit to finance an affair or a criminal endeavor, family court could separate that debt from community property.
Another possible exception is when a spouse takes on debt during the marriage that only benefits their separate property. Consider the example of a couple who marries and buys a home together while one spouse also keeps ownership of a home they purchased while single. A home equity loan taken out by the owner of the separate home to finance the installation of a pool and other improvements can be separated from community debt by the court, as it serves to benefit only the spouse owning that home.
Are Student Loans Community Debt in Arizona?
Student loan debt can create extra complications for the parties in a divorce and the family court judge is tasked with assigning its status as separate or community debt. When most people think of student loan debt, they think of loans taken out by 18-and-19-year-old undergraduates taking on substantial personal debt to finance their education. That perception doesn’t account for married couples where one spouse returns to college to foster a career change or working professionals earning masters and doctoral degrees.
Digging deeper into instances where a spouse takes out student loan debt during a marriage, consider the case of a college professor whose doctoral studies created opportunities for prestigious promotion. The other spouse in the marriage is likely to be assigned any of that debt in a divorce when the benefit of the education now solely benefits the newly minted PhD.
Facets the court must consider in these instances include the following:
- Arizona is a community property state to preserve fairness and equity. If the debt was acquired during the marriage with the intention of providing a better life for the couple, the debt should theoretically still be divided to achieve fairness.
- If an agreement was made during the marriage between the spouses regarding responsibility for student loans, the court will take the agreement under consideration.
- Loans that paid strictly for tuition, college fees, textbooks and other educational expenses are more likely to be viewed as a separate obligation of the student earning the degree. On the other hand, loans used to cover living expenses for the couple while one worked less or exited the workforce entirely is more likely to be classified as a community obligation.
- Unlike most debts that can be assigned during a divorce, bankruptcy does not absolve the obligation of student loans.
- All presumptions pertaining to the student loans must be rebutted by evidence from the party seeking to avoid the obligation.
Arizona permits judges a great deal of leeway in terms of their ruling on student loan debts. They may consider the debt community debt and split it evenly, consider it separate debt and assign it to the spouse who took out the loan originally, or assign the debt in disproportionate amounts to account for the spouse who benefited from the education.
Limit the Ties to Your Spouse in a Divorce
Once the divorce process has begun, it’s in your best interest to limit your financial connections to an ex-spouse. This means you should eliminate as much community debt as possible while finalizing the divorce. Failure to do so only further jeopardizes your finances based on the behavior of your ex-spouse. Good-faith negotiation and an agreement that leaves as little as possible up to the judge are key to eliminating community debt.
During the divorce, it is permissible to liquidate certain assets from community property to liquidate community debt. It may be a hard pill to swallow, especially if you are liquidating assets you already viewed as your own property versus community property. However, if you are risking losing a portion of that asset in the divorce, it may be best for all involved to resolve community debt.
Secured debts should be designated to whichever partner is keeping the asset with the lien. If the asset will not be sold, it should be refinanced in that individual’s name only. Couples can negotiate an agreement to dictate sale of the property by a certain date if refinance hasn’t occurred.
Taking a Proactive Approach to Debt Division
The best way to avoid being taken by surprise by the quantity of debt considered community debt during a divorce is to understand your romantic partner’s finances and be forthright about your own. Honesty before and during a marriage reduces contention over finances during a divorce.
Of course, sometimes finances are one of the primary causes of a divorce. If frank honesty isn’t enough, you may want to consider a prenuptial agreement to establish which assets and debts are assigned to whom in the event of a divorce. Taking this step means involving legal counsel in your marriage from the outset, as Arizona requires each party to have independent legal review of the agreement. For the prenuptial agreement to be considered valid, both partners must be privy to the financial assets or debts they are taking on according to the agreement.
*Editor’s Note: This article was originally published May 7, 2021 and has been updated July 29, 2022.
Ryan Reppucci, Co-Founder of The Valley Law Group, is recognized as one of Phoenix’s leading family law attorneys. After graduating from Arizona State with the highest honors and inclusion in America’s most prestigious student honor societies, Ryan attended the University of Detroit Mercy School of Law. His career as a law student was decorated with numerous awards, including the University of Detroit Mercy School of Law Book Award, nomination for membership in Who’s Who Among Students in American Colleges and Universities, as well as Moot Court.