Category: Settle out of court

What is the Impact of Marital Debt?

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By Amy A. Edwards

I recently had a client ask what it means, exactly, to have marital debt. That’s a fair question. In North Carolina, the legal process of dividing marital assets and marital debts is called equitable distribution. Spouses or former spouses have a marital estate, and each usually gets half of the marital estate.  Think of the marital estate like a pie. Marital assets and marital debts make up the pie, which is sliced and cut in half.

With several exceptions, marital assets are assets acquired by either spouse during the time the parties are married and living together. Marital assets are the starting point of the marital estate pie but if there are no marital assets, then only the marital debt is divided between the parties. Separate property includes things like inherited property or property acquired before marriage. It is not added to the pie, so it isn’t be sliced up and divided between the parties. After the marital assets are divided, the debts are taken into account and either divided or not divided, depending on whether the debts are marital.

To be a marital debt, the debt must be generated during the marriage, and exist at the date of separation. The debt must be for the “joint benefit” of the marriage in order to be marital. Usually, a joint benefit is something that benefits both parties, even if the benefit is indirect, such as using a credit card for groceries, gas in the car, something for the children, etc.  If a debt is a separate debt, it does not have any impact on the pie that is the marital estate. The person with separate debt is stuck with responsibility for paying it. On the other hand, marital debt is “credited” to the share of the marital estate that the person paying the debt will receive. The marital estate is thereby adjusted to account for the payment of marital debts.

Example A (no marital debts)
Marital Assets: $100,000 (house equity, cars, etc.) ÷ 2 = $50,000 each
Husband gets $50,000
Wife gets $50,000

Example B ($10,000 in marital debt)
Marital Assets: $100,000 (house equity, cars, etc.) ÷ 2 = $50,000 each
Husband gets $50,000
Wife gets $50,000

But Wife pays $10,000 in marital debt, so she really only got $40,000.  Husband would owe Wife $5,000 in assets or money so that each spouse gets $45,000 (50% of the adjusted marital estate).  But if Wife paid $10,000 in separate debt (i.e., non-marital debt), she would not get any credit for paying it and each spouse would still get $50,000 in value for his or her share of the marital estate.

 

 

Should You Settle or Let the Judge Decide?

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There are a number of ways to address child custody and support, alimony, and/or equitable distribution (division of marital property). Each case is different but there are similarities. Reaching an out of court settlement has the benefit of flexibility, allowing you to choose an arrangement you can live with instead of risking what a judge may decide. Compromise is a result of giving up some things to be sure you get certain other things. Privacy is also a benefit, keeping your personal matters out of the courtroom. Settlement by negotiation, mediation or collaborative family law is frequently quicker and less expenses.

However, settlement may not be in your best interest. An emergency may require immediate attention and a court order. No matter how badly one person may want to settle, the other may be completely unreasonable. Other times, the court’s ruling prevents a party from being taken advantage of where there is a significant power imbalance and/or domestic violence. On the other hand, going to court usually take a long time, and involves “busy work” that can be costly. The stress and emotional toll of court cannot be overlooked, not only on the parties but on the whole family in some cases. Your attorney is the best person to guide you through the maze, based on your goals and expectations.

How a Contract Magically Becomes a Court Order: Incorporation

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In the world of family law in North Carolina, there are three ways to address agreements: contracts, court orders and incorporation.

Contracts

Contracts are agreements signed by the parties, such as a separation agreement. If someone violates the contract, it is called breach of contract. A contract is enforced by a “specific performance” lawsuit, asking the court for an order requiring him or her to perform the specifics of the contract, such as signing a deed, refinancing a mortgage obligation, etc. A contract generally can’t be changed by the court. However, the court always has the authority to change anything related to child custody and support until a child is 18 years of age, regardless of what the parties set out in a contract.

Court Orders

Court orders are only available after a lawsuit has been filed, and they must be signed by a judge to be valid. The best part about a court order is the remedy. A party who violates the court order is subject to being held in contempt of court for failure to obey the court order. The contempt power of the court gives the judge discretion to do whatever he or she sees fit to enforce the order, depending on the circumstances presented. Although they don’t usually do so until after someone demonstrates they will remain obstinate, judges have the authority to incarcerate someone who continues to disobey court order. Orders can be registered in any state to be enforced with the full faith and credit of another state.

Incorporation

Our state has what is called incorporation, a special process by which a separation agreement “magically” becomes a court order once a judge signs it. But a judge cannot sign anything until there has been a lawsuit filed. Incorporation is done only by agreement, which is usually mentioned in a separation agreement. After a full year of separation has passed, either spouse can file for a divorce. When the judge signs a divorce decree, he or she also has the authority to incorporate it into the decree, permanently making it an order of the court.

What is a Separation Agreement?

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A Separation Agreement and Property Settlement is a voluntary contract between a husband and wife of ex-spouses. It may be signed no sooner than separation, and may be signed at some later date, even after the parties divorce. The parties can settle some or all of the issues, including child custody, spousal support (alimony), child support, and division of marital property and debts (equitable distribution). The laws are written to encourage settlement instead of litigation. Therefore, a properly drafted separation agreement is extremely difficult to change or void.

What Things Can We Include in the Agreement?

Because they are contracts mutually agreed upon, separation agreements can include just about anything. One of my favorite war stories involved a case where we agreed on horse custody and visitation. We even included terms for which farm the horses would stay and whether each “horse parent” would be entitled to allow future romantic partners to ride the horses. That type of outcome will never happen in court. In our state, horses are legally treated as personal property no different than a television or set of china.

Express Lane: Is There a Form I Can Use?

Even some attorneys who don’t handle family law cases, or just  dabble in family law, do not realize there is no “boiler plate” form.  In fact, separation agreements are popular because they can be customized to whatever terms agreed upon by the parties. Imagine going to a mechanic and asking for “the standard repair.”  All cars have tires and a steering wheel, but a Corvette and a VW Bug don’t call for the same repairs.  It is no different with attorneys who draft separation agreements. Some are very complex, but others might not be.

While separation agreements do have certain magic words for the more routine things, such as jurisdiction of the court to interpret the agreement for example, a good attorney will address dozens of other issues specifically. For instance, the agreement might include a disclosure paragraph that dictates whether the parties are obligated to tell each other about hidden assets, inheritance rights, or address certain significant tax consequences.

Buyer’s Remorse: Enforcement

Separation agreements can be written to spell out the types of enforcement mechanisms that will be used if it is violated. The agreement may be treated like a contract, which is enforced by a lawsuit based on breach of contract. Other times, the agreement may be drafted to become a court order at some later date, enforced directly by the court. The agreement can say that violations will trigger certain consequences. Or, it may dictate when and how child custody and/or support lawsuits can be filed at some later date. All of these enforcement options are another example of ways attorneys draft agreements based on each client’s specific needs and priorities.