Community vs. Separate Property / Debt Basics

What is Separate Property?

Separate property means just what it says – it is the separate property of one of the spouses, and accordingly does not have to be divided with the other spouse.

Arizona law defines separate property as property that is acquired prior to marriage, or received as a gift from a third party, or received by inheritance. This also includes gains on such property (such as rent, interest, appreciation, etc.). If somebody transfers their separate property from one account to another, or if they purchase assets with such separate property, what they buy or invest in generally stays separate property so long as they can trace the property or investment back to their separate property roots. 

That being said, there can be twists and turns in the law regarding separate property. This includes situations where parties mix separate and community funds, where they add the other spouse to ownership documents, where community funds are used toward separate property real estate and other situations. These are addressed in much more detail under the Complex Property Issues section of our website. 

What Are Community Debts?

Under Arizona law, it is presumed that any debts incurred during the marriage are considered community debts and are generally divided between the parties equally. This is true regardless of whether one of the parties earns more income than the other. Because both spouse’s have the ability to incur a debt on behalf of the community, neither party has to obtain the other’s spouse’s permission. Accordingly, even debts taken out during marriage without the other spouse’s permission or knowledge are presumed to be community debts. An example of this is secret credit cards opened without the other spouse’s knowledge. 

Similar to community property, the Court is obligated to divide community debts “equitably”. Absent proof that an equal division is not “equitable”, this means the Court will generally order an equal division of all community debts. 

There are instances where the Court may order an unequal division of debts. Again, the fact that the parties have unequal incomes is usually not enough. One of the major examples that the Courts have sometimes assign an unequal division of debt are student loans taken by one of the parties. Although such would be presumed to be a community debt if acquired during the marriage, the Court can decide that it would not be equitable for the other party to pay a portion of such debt, for example if the party receiving the education will essentially receive all or most of the benefits of the education. 

We cover separate debts and the equitable division principles in more detail in our Complex Property Issues page of our website. 

What are Sole and Separate Debts?

Debts incurred by a spouse prior to the marriage remain his / her separate debts, and thus neither the other party (or the community) is liable for any such debts.  Similarly, if a party incurs debts during the marriage associated with their own separate property, such is generally determined to be a separate debt. Exceptions, however, may apply if the other spouse signs a personal guarantee, promissory note or other written agreement to be jointly responsible for such debt. 

A situation often faced in divorce cases is where a party who had a separate debt uses community property during the marriage to pay all or a portion of such debt. The Court has the power to order the reimbursement to the community (often in the form of a community lien) if the Court finds that such is equitable under the circumstances. 

We address separate versus community debts, and reimbursement claims in much more detail in our Complex Property Issues portion of our website. 

What Is a Community Lien?

A community lien is a reimbursement claim by the community against a spouse’s separate property interests where community funds or community efforts have benefitted such separate property. 

A community lien may exist where one of the parties’ efforts has at least in part led to an increase in value, equity, or profits that has benefitted separate property. This most commonly applies in separate property real estate and separate property business situations.

For example, a situation that parties often face is when somebody owns a home prior to marriage (and keeps the home is just his/her name), but the community (i.e. either or both spouses) pays the mortgage payments and/or makes improvements to the home during the marriage. In such event, the home would still be technically separate property, however, the community would have a claim to a portion of the equity in the home. Arizona caselaw sets forth a formula whereby the community would receive reimbursement for the principal paydown of the mortgage plus a pro-rata share of the increased equity from market appreciation. In addition, the community would be entitled to reimbursement for any increase in value attributed to its capital improvements to the real estate. 

A community lien claim may also arise where there is a business owned prior to marriage (i.e. thus separate property), but the business increases in value during the marriage as a result of one or both parties’ efforts. The community “may” have a claim to a portion of the increase in value that took place during the marriage, as well as undistributed earnings, depending upon the circumstances. We address this issue in further detail under the “Complex Property Issues” section of our website. Click here to learn more about business valuation issues and how the community may have a claim to the increase in value.

When Does Community End?

At such time that one spouse has the other spouse served with a divorce or legal separation petition, the community is terminated (assuming a final decree is eventually entered). This means that each party’s newly earned income from that point forward is generally their sole and separate property (subject to certain exceptions). Similarly, any new debt incurred by either spouse after service of process would be the borrowing spouse’s sole and separate debt. 

Like the other areas of family law, there are often twists and turns in the analysis, such as where post-service income is received from a community property business. We address these twists and turns in more detail in our Complex Property Issues section of our Website. 

Who Should Pay for The Community Liabilities During the Divorce?

This is a situation we see many clients face. Who is going to pay the mortgage during the divorce? Who is going to pay the car payments? Who is going to pay the utilities for the marital home? What expenses are considered community expenses, and what expenses are post-service sole and separate expenses? 

In general, both parties have an equal obligation to pay community debts until they are formally divided or otherwise resolved by a final divorce judgment. Sometimes the Court may order one of the parties to pay most or all of the expenses until the case is concluded, and then order the other party to pay back his or her 50% of the obligations out of their share of the community assets. 

However, there are sometimes twists and turns to such analysis. For example, the Court may require one of the parties to pay the community debts during the divorce proceedings as part of his/her spousal maintenance obligation. In some cases, only one of the parties is using the asset upon which the debt is owed, i.e. an automobile for example. In such cases, the Court may hold that the party receiving the benefit of the asset should have to pay the associated payment (i.e., the car payment, etc.). This is usually addressed either by agreement while the divorce is pending, or a motion for temporary orders, which is addressed in a separate section of this website.

Divorce case law in Arizona has recently reinforced the concept that community obligations, including the monthly home mortgage payments,  are to be divided equally between the parties during the divorce proceedings even if only one of the parties is living in the residence. This is a common situation in divorce cases where one of the parties moves out of the marital home. There is an exception to the general rule that both parties are equally responsible for such payments if there has been an “ouster”, which means that one of the parties was essentially forced out of the home or precluded from using the asset at issue by the other party. 

We address more complex property issues, such as advanced business ownership issues, waste claims, reimbursement claims and other issues in our Complex Property Division section of this website. If you are interested in learning more, click here.

Conclusion

If your case involves substantial assets and/or complex issues, we highly encourage you to spend more time reading the Complex Property Issues section of our website by clicking here.

If you have complex property issues it is important to consult with a very experienced divorce and family law specialist. It has been our experience that many attorneys simply do not understand many of these very important distinctions. Some of these attorneys are newer and have not completely learned all of the ins and outs of complex divorce issues. Some attorneys practice in numerous areas of the law and are have not made divorce and family law their top priority. As one of the top premier divorce firms in Arizona, we will go the extra mile and take great care of you at Bishop Del Vecchio & Beeks.