Divorce, Equitable Distribution and Debt

One of the reasons the topic of divorce fills so many people with anxiety and dread is because of the necessary dividing up of the former couple’s property. Disagreements over who gets the house and the pets and the candlesticks Aunt Vicky gave you at your wedding can quickly turn nasty. Compounding this is the fact that the debts one spouse accumulated during marriage can be subject to division between spouses, leaving both parties responsible for them.

Equitable Distribution in North Carolina

The concept of “equitable distribution” governs divorce in North Carolina when it comes to dividing marital property and debt. Equitable means fair, not necessarily equal. However, there is a strong presumption under North Carolina law that an equal division of debts and assets is fair. A majority of states base their divorce property division laws on the equitable distribution model, which is grounded in the idea that marriage is a partnership where each spouse makes contributions.

Before equitable distribution can occur in a North Carolina divorce action, the trial court will first classify a couple’s property and debt as “separate,” or “divisible,” or “marital.” This is not an all-or-nothing classification, however.

Understanding Separate vs. Divisible vs. Marital

Unlike some states that classify property according to which spouse’s name is on the title, North Carolina adheres to the “Source of Funds” rule for asset classification. This means a court will trace the funds used to acquire property and classify that property accordingly. For example, if one spouse combines her own money with marital money and purchases property in only her name, that property can still be classified as part marital and part separate.

Generally, only divisible property and debt are then subject to equitable distribution, or being shared between the spouses. However, if property titled separately to one spouse was acquired using marital or divisible funds, that property can also be subject to equitable distribution.

Divisible property can include the following:

  • Any property acquired from the efforts of either spouse during the marriage but before separation and actually received during separation but prior to divorce. This includes bonuses, commissions and contractual rights.

  • Any increase or decrease in marital assets that occurs between separation and the date the judge enters an equitable distribution order (not including expenses or increases incurred because of the separation)

  • Passive income, such as stock dividends and interest, generated from marital property which either spouse receives after separation; and

  • Increases or decreases in marital debt, including related financing charges and interest.

Debt Distribution

Debt is treated differently than assets in North Carolina for purposes of equitable distribution.

The spouse who is claiming that a debt is marital, and therefore subject to being shared between the spouses, has the burden of proving the following to the court:

  • That the debt was incurred after marriage but before separation.
    • The courts usually do not address debts that are incurred after a couple separates. However, if one spouse incurs a debt to pay off a marital debt, the court can treat those payments as divisible property.

  • That the debt was incurred for the joint benefit of both spouses.
    • JOINT EXPENSES: Expenses for the maintenance and care of a couple’s home and children are generally classified as having a joint benefit. An individual spouse’s child support and alimony obligations are his or her own separate debts. Medical expenses incurred by a spouse who knew separation was impending but at least partially intended to increase the amount of marital debt, can also be classified as separate.

    • STUDENT LOANS: A former spouse’s student loans taken out during a marriage can be classified as marital debt, the North Carolina Court of Appeals ruled in 2015 for the first time. Furthering your education inevitably increases your earning capacity under the eyes of the law because earning a degree usually makes a person eligible for different jobs, higher pay, better benefits and increased social standing. If the marriage lasted long enough after the completion of a degree that the debtor spouse enjoyed those benefits, the court can apply this to the other spouse as well and classify the student loans as a joint benefit from which both parties enjoyed benefits.

    • VERSUS SECRET LOANS: Unlike the two categories mentioned above, debt that benefitted both spouses that one spouse did not know about has been classified as separate before by the North Carolina Court of Appeals. For example, if one spouse takes out a loan for the couple’s living expenses, but the other spouse did not realize they were living on loan money together, that debt could be classified as the borrowing spouse’s separate debt.

Debt Valuation

If a debt is classified as marital, the valuation of the debt will be calculated as the debt’s amount as of the date of the couple’s separation. However, if a debt is classified as divisible, the debt will be valued as of the date the judge enters an order of equitable distribution.

Marital debt cannot be discharged, or cancelled, in a Chapter 7 bankruptcy proceeding. However, Chapter 13, or “repayment plan” bankruptcies, allow for the cancellation of marital debts at the end of the three to five year repayment plan. The two exceptions to this that cannot be discharged are child support and alimony.

If you are facing a separation, divorce or other family law matter it is important to have an experienced attorney to help protect your rights and guide you through the complicated process. Please contact Arnold & Smith, PLLC today to speak with one of our family law attorneys about your case.