Existing Contracts. The Court can and will assign to each party their share of the assets and liabilities. What the Court cannot do, however, is rewrite existing contracts. It can order one party to be responsible for the debt. It can include a “hold harmless” and “indemnify” provisions that require the spouse awarded the debt to pay back the other spouse if creditors of that debt come after them.
But at the end of the day, the contract signed when the parties were married is still intact. And a creditor can go after either party, regardless of what the divorce court.
This is important because there are usually two contracts in almost every marriage that can have a major financial impact on the parties: A mortgage and a vehicle loan. It’s also common to see HELOC loans. So, what can be done to protect the party who is not taking the house or the car?
Here are a few options:
Refinancing. The easiest way to remove names from loans is for the spouse who is keeping the home, vehicle, or other property on which the community has a loan. The biggest question is always—does the person who wants to keep qualify to refinance it. This needs to be known before a divorce agreement is made. The best thing to do is to have that person prequalify. If the prequalification is conditional, then those conditions need to be known and so the parties either negotiate to meet those conditions or abandon the idea of refinancing. As mentioned above, whenever parties agree to a refinancing, there should be a deadline for when it occurs and a consequence if it is not met (usually listing the home, vehicle, or other asset for sale).
Taxes. Divorce has a tremendous impact on taxes from how you file to what you pay to who claims the child in what year. Here are some ways a divorce may impact your taxes:
Social Security. Many people will need to rely on their spouse’s Social Security benefits in order to meet their needs in their old age. While Social Security is not divided in a divorce, a divorce will impact your ability to draw on your spouse’s Social Security. Here’s what you need to know about social security and divorce:
Health Insurance. If you are on your spouse’s health insurance, your health insurance is going to be affected by divorce. During the divorce proceedings, your spouse will be prevented from removing you from their insurance under the Preliminary Injunction, a court order that, under Arizona law, goes immediately into effect when the Petitioner (aka the person who starts the divorce in the Court) files for divorce (It is binding on the Petitioner at the time of filing, and binding on the Respondent at the time of service).
But once divorced, health insurance is something you will be responsible for. Fortunately, federal and state laws offer a stepping-stone approach to people who have recently been divorced. Whether you qualify really depends on the status of your spouse’s employer.
The federal law, known as COBRA, requires employers of 20 or more employees to offer their employees and their families a temporary extension of health coverage (18 months) under certain circumstances, including divorce. The state law, known as mini-COBRA, extends the eligible businesses who must offer this insurance to a divorced spouse to include small businesses of less than twenty (20) employees who offer health insurance as a benefit.
Here is what to know about this coverage:
If you are not extended health insurance through one of the COBRA laws or if you want to consider a different plan, you should be aware that divorce is one of the “life-changing events” that allows a person to obtain insurance outside the Open Enrollment Period.
Life Insurance. If you designated your spouse as a beneficiary of your life insurance policy and you are now divorcing your spouse, you may need to revisit your beneficiary designation on the life insurance.
In 1995, the Arizona state legislature adopted a revocation-upon-divorce law that, among other things, automatically revokes your spouse as the beneficiary of the life insurance policy at the time of divorce. So if your spouse has been the beneficiary, and you are getting divorced, you now have no beneficiary for your life insurance policy.
So once your divorce is final, one of the first things you should do is call your life insurance company and designate your beneficiary. It can be your ex-spouse or it can be someone else. This change should be made in writing. If you choose to keep your ex-spouse as a beneficiary, the revocation-upon-divorce law will not apply to your situation so long as you re-designated your spouse as the beneficiary after the divorce became final (that means you’ve received the Divorce Decree, signed by the judge, divorcing the two of you).
Be aware that this law does not apply to employer-provided life insurance policies. Those employer-provided benefits are governed by a federal law called ERISA, and it keeps the beneficiary you designate intact, regardless of whether you are divorced or married. This federal law overrides state law. If you have one of these plans, and you do not want your spouse to receive the proceeds, you must change the beneficiary. We recommend you contact your plan administrator ASAP to make that change.
Also be aware that in cases of spousal maintenance and child support, your spouse may require you to keep life insurance designating them as the beneficiary for the remaining amount owed for support. This is quite common. If it’s required of you, then, again, you should re-designate your spouse as the beneficiary once the divorce is finalized.
Children’s college funds. A divorce can affect the finances available for your child’s college education. Here’s what you need to know about how divorce might affect your child’s educational funding:
Arizona law does not require a parent pay for a child’s college education, but the parents can agree that they will pay for it. The duty to pay child support terminates either when the child turns 19 or when the child is 18 and graduates high school. Arizona law does not require a parent pay child support beyond that point, except where a child has severe disabilities.
Further, Arizona law does not require a parent fund a child’s education. Putting this altogether, if you try to get the Court to order that the other parent funds your child’s education, you will lose that case in Court.
But if you want such an agreement, an option is available to you—reach an agreement in writing with the other parent that they will fund the child’s education. If you make this agreement and put in the Divorce Decree, the Court will enforce it.
But be aware that to enforce it, you will need to file in civil court, not family court, to enforce that provision.
If a 529 savings plan was started during the marriage, the 529 savings plan needs to be determined in the Divorce Decree. A 529 plan has many advantages for parents looking to save for their child’s education. But despite being for the child, the 529 actually belongs to the parents. That makes it a marital asset.
The 529 will need to be divided as part of the Decree. This is usually done by designating one parent as being in control of the account and including language within the decree requiring that parent to maintain the 529 savings plan for the benefit of the child.
Inheritance. If your spouse is named as a beneficiary in your will or trust, that is revoked upon divorce, although you can execute a new will renaming your spouse as a beneficiary in a will or a trust. For more information on this, see our tab on “Spouse as a Beneficiary.”
But how does divorce affect what you inherit? First, divorce should not affect what you inherit. Inheritances are exempt from the community property laws in Arizona, so when it comes to your inheritance, it should not matter whether you are married or not.
Divorce can impact your inheritance, though, if you “commingle” your inheritance with community funds. Let’s say, for example, you inherited $10,000.00 from your grandmother and you put that money into the account where your money and your spouse’s paycheck goes, that $10,000 is going to be considered community property.
Spouse as a Beneficiary. During a marriage, spouses commonly list each other as beneficiaries on various financial instruments, including wills, trusts, IRAs, 401(k)’s, etc. Upon a divorce, a law may or may not automatically change the beneficiary on these financial documents. Here’s how those various financial instruments are treated during a divorce:
Remember this is contingent on there being a divorce. If a spouse dies before the divorce is finalized, the beneficiary designations remain unchanged. If a couple is legally separated, the beneficiary designations remain unchanged.
But what about an annulment? When it comes to changing the beneficiary designation, Arizona law treats an annulment like a divorce, so the beneficiary does change just as it would in a divorce.
Bankruptcy. Divorce and bankruptcy proceedings should not coincide with each other. Either wait to divorce until after the bankruptcy is complete or wait to file bankruptcy after the divorce is complete. Be aware that there are risks associated with both options.
For example, let’s say Spouse A and Spouse B owe $100,000.00 on a loan. If they file for bankruptcy together before the divorce, this debt can be discharged for both of them, but both of them also have a bankruptcy on their record.
So let’s say they opt to wait until after the divorce. The divorce court orders Spouse B to be solely responsible for the $100,000 debt. After the divorce, Spouse B files for bankruptcy, and the debt is discharged. What do the creditors do? They come after Spouse A for the full $100,000.00. They can do so even though the divorce court assigned the debt to Spouse B and the debt was discharged. This is because the Courts cannot change the terms of existing contracts.
If you are considering a bankruptcy and a divorce, this is something that should be discussed with a bankruptcy attorney.
You should also be aware that some debts cannot be discharged in a bankruptcy. These include spousal maintenance, child support, and attorney’s fees owed from a child custody matter.
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