Tuesday, September 14, 2010

Spousal Maintence vs. Property Equalization Payment - Which is Best?

When negotiating a settlement agreement in which a monthly payment is to be made following a divorce, parties are sometimes faced with a decision:  Should we designate the payment as spousal maintenance -- or should it be considered a property equalization payment?  There are pros and cons to both options. 


The purpose of Spousal Maintenance is to provide financial support for a former spouse who qualifies under A.R.S. §25-319.  Under Arizona law, spousal maintenance payments are taxable to the spouse who receives the payment and deductable to the payor.  Since the person on the receiving end will have to pay income tax on the payment, she or he will wind up with something less than the full amount.  On the other hand, there is a measure of security since it is very difficult to avoid one’s obligation to pay spousal maintenance – especially if it is designated as “non-modifiable.”  Under 11 U.S.C. 523(a)(5) the Bankruptcy Court has no power to discharge a debt for payment of spousal support.  Knowing that the spousal maintenance award cannot be discharged in bankruptcy provides a level of safety that may be important.


A “property equalization payment” is intended to equalize the final division of property between parties to a divorce.  It can be paid in a lump sum or by installment payments.  Unlike spousal maintenance, a property equalization payment does not result in a taxable obligation.  Thus, the receiving party “pockets” the entire amount.  However, if the person obligated to pay a property equalization payment files for bankruptcy, the entire unpaid balance could be discharged under 11 U.S.C. 523(a)(15), and the party on the receiving end could wind up with nothing.

In our struggling-economy, I've handled a growing number of cases in which a former spouse threatens to cut off his or her spousal support obligation by filing for bankruptcy.  Current bankruptcy law makes that an idle threat.  However, if the payment is determined not to be spousal support but, rather, a property equalization payment, then there is a danger that the debt could be discharged in bankruptcy.

The decision whether to structure a payment as spousal maintenance or an equalization payment should be made only after a careful and thorough examination of all relevant factors.  Once that decision is made, the provision must be worded precisely in order to assure that there will be no confusion about the parties’ intent.  Gary J. Frank has over 25 years of experience in handling complex divorce and property division matters.  If you have questions or concerns about your own situation, please do not hesitate to call for a consultation.  Our phone number is 602-383-3610.  For more information, contact us be email or check out our web site at www.garyfranklaw.com.