"How should we deal with our marital debt? We owe more than we own, and I don't want to end up holding the bag because I earn more than my spouse."
Just because one party to a divorce earns more than the other doesn't necessarily mean that that party will be held responsible for more of the marital debt. States that embrace the concept of "equitable distribution" (the vast majority) have statutes that set forth the factors that must be considered in allocating assets and liabilities between divorcing couples.
In New Jersey, the Equitable Distribution Criteria describe the factors that must be considered by a court, each party, and their attorneys in formulating a settlement proposal. The criteria are as follows:
a) The duration of the marriage;
b) The age and physical and emotional health of the partners;
c) The income or property brought into the marriage by each party;
d) The standard of living established during the marriage;
e) Any written agreement made by the parties before or during the marriage concerning an arrangement of property distribution;
f) The economic circumstances of each party at the time the division of property becomes effective;
g) The income and earning capacity of each party, including: educational background; training; employment skills; work experience; length of absence from the job market; custodial responsibilities for children; and the time and expense necessary to acquire sufficient education or training to enable the party to become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage;
h) The contribution by each party to the education, training, or earning power of the other;
i) The contribution of each party to the acquisition, dissipation, preservation, depreciation, or appreciation in the amount or value of the marital property, as well as the contribution of a party as a homemaker;
j) The tax consequences of the proposed distribution to each party;
k) The present value of the property;
l) The need of a parent who has physical custody of a child to own or occupy the marital residence and to use or own the household effects;
m) The debts and liabilities of the parties;
n) The need for creation, now or in the future, of a trust fund to secure reasonably foreseeable medical or educational costs for a spouse or children;
o) The extent to which a party deferred achieving their career goals; and
p) Any other factors which the court may deem relevant.
If the case goes to trial, the judge will make specific findings of fact based on the evidence relevant to these issues.
In considering the criteria, one must understand that it is a rebuttable presumption that each party made a substantial financial or non-financial contribution to the acquisition of income and property, as well as debt, while the parties were married.
In my opinion, the most critical factors in allocating debt in any long-term marriage are f), g), h), and i). In a short-term marriage, the most critical question is whether the family unit acquired the debt or one party incurred it who already has or will personally benefit from it (i.e., college loans, personal clothing, jewelry, car, etc.).
"Equitable distribution of debt" is therefore not necessarily the equal sharing of debt: it is what is fair and reasonable. If the income capacity of one party is significantly greater than that of the other party, the former may need to bear a larger portion of the marital debt, all other things being equal. The court will attempt to consider all the facts and circumstances. Therefore, the parties and their attorneys, in any attempt to settle, should also try to do the same.
Laurence G. Thoma, CPA, is an accountant, lawyer, and certified fraud examiner practicing at Withum Smith and Brown in Red Bank, NJ. In his 34-year career, he has served as an instructor at the American Academy of Matrimonial Lawyers and the New Jersey Judicial College.
Certified Divorce Financial Analyst
Business Valuators / CPAs