As a part of the divorce process, the parties must determine how any property and obligations accumulated during the marriage will be distributed. The parties can come to an agreement on their own, or they can ask the court to resolve any disputes. Once an agreement is reached, it is formalized in a written property settlement order issued by the court.
As the laws governing property settlement in divorce have evolved over the centuries, two distinct approaches have emerged: the principles of equitable distribution and community property. Currently, only nine states adhere to a community property standard: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin
Before looking at how community property works, let’s first look at the equitable distribution approach, which is followed in the 41 states not listed in the above paragraph. In those states, courts seek to fairly divide all assets and debts of the marriage by considering a number of factors:
There is no specific formula for computing the percentage of property that will go to one party. It just must be equitable, or fair. It’s important to understand that “equitable” does not mean “evenly,” though it often can.
In contrast, in the nine states that follow the community property approach, almost all assets of the marriage are jointly owned by the husband and wife. Likewise, all debts incurred during the marriage are considered joint obligations.
In community property states, one of the first steps in the property settlement process is the allocation of property as either community property or separate property. Separate property includes:
Property deemed to be separate property in a community property state is returned in full to the party who brought it into the marriage or received it during the marriage.
All other property of the marriage is considered community property. That includes any income earned by either party and any assets purchased by either party (even if titled in the name of one party only). The court may even find that assets brought into the marriage by one party became community property during the marriage. For example, if one spouse enters into a mortgage for a house a year before marriage but the parties keep the house and pay off most of the mortgage during the marriage, the house is likely to be considered community property.
Though community property states require an even distribution of community property, in practice that can be difficult, as some assets, such as real property, cannot easily be divided. Accordingly, the court will offset the allocation of a substantial asset to one party by giving the other party a larger number of smaller assets or more of any cash or liquid assets in the marital estate.
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