In previous blogs we have discussed what property is considered “marital” property and subject to division between the spouses when they divorce. Generally, all property owned by either spouse before or during the marriage, regardless of who is the account holder or title holder, is “marital” and divided equitably (fairly, usually 50/50).
Determining what IS marital property is only the first step towards dividing it up during a divorce action. The second step is to determine the value. The court has discretion to chose any date of valuation between the date of filing (the petition for dissolution of marriage was first filed) and the date of the final hearing. When there are a lot of contested issues in a divorce action, including child related issues, divorces can drag on for months, or in extreme cases, years. This means that a court has the task of determining the value of a house, a brokerage account, credit card debt, or retirement accounts at some distinct point in time, often in the past.
If the last few years of living in this economy has taught us nothing else, it has taught us that one’s financial situation at any given point in time can be perilous. People lost significant funds in retirement accounts and house values when the market crashed in 2007. Some sectors of the economy have recovered, and for those that hung in there with their investments, investments have seen growth.
Because of market fluctuations, the date a court chooses (or the parties agree to) for purposes of valuing the property (what was the value on a specific day) plays a significant role in division of property. The reason a court needs a valuation is to balance out the division equitably, but in reality, when the division of property actually occurs (he takes this bank account, she takes that retirement account, and titles and funds are transferred) the actual value could be something different than the court determined the value was for purposes of division. Because of the need for a baseline start point, the court allocates the risk of gain or loss on a particular asset to the spouse ultimately getting the asset at the end of the divorce.
For example, a house is worth $100,000, and has a $50,000 mortgage on the day the petition for divorce is filed, but has decreased in value to $90,000 by the date of the final hearing. If the court uses the date of filing, each party gets ½ of the equity, or $25,000 each, so if Wife keeps the house, she would have to give husband $25,000 in other property to balance out the division. But, if Wife wants to sell the house after the divorce, she could only sell it for $90,000, so once she pays off the mortgage, she is left with only $15,000, rather than $25,000.
When property has wide swings in value while the divorce is pending, the spouses run the risk of gaining the benefit of an increased value, or losing when the value decreases significantly. For this reason, it is important to consider the changed values as the divorce action is pending, and if there are large gains or losses, it is important to place this information before the court so that the court can make a fair division of property with all important information in front of it.
We hope that you have found this information to be helpful in understanding why the date of valuation is an important consideration in the division of property during a divorce action. This is not intended to be legal advice. If you have questions or concerns about your specific case, CIYOU & DIXON, P.C. can help evaluate your specific case. This blog post was written by Attorney, Lori B. Schmeltzer.