Division of Debt in Tennessee Divorce Law

It may be appealing to forget about the marital debt since it can be an unpleasant thought, but the division of debt must be part of the divorce.

Debts are applied against all of the marital assets in divorce to determine the net marital estate. They necessarily reduce the value of the overall assets to be divided.

If one spouse assumes more debt than the other in the divorce, they can be awarded more of the assets to make up the difference. It is important to obtain your credit report, especially if you have not been the spouse in charge of the family’s finances. This way you can make sure of all the debt you have in your name.

Under Tennessee law, you and your spouse are free to divide the debt in whatever way seems fair to both of you, but some of the factors a court would consider are the following:

  • who benefitted from the debt
  • who has the ability to carry the debt payments after the divorce
  • who incurred the debt in the first place
  • what are the tax consequences, if any, of carrying the debt.

Sometimes creative solutions need to be employed to handle the division and disposition of large amounts of marital debt.

Financial and tax experts in concert with your attorney can be helpful in solving complex debt issues, such as when parties owe back taxes to the IRS, or when Qualified Retirement plans might be used to pay off debt.

Please also see the series of TN Law Topics in the web site on the Division of Property under Tennessee law.

Unvested and Vested Stock Options and Property Settlements in Tennessee Divorce

Clients often wonder whether they will have to divide their unvested stock options as part of a divorce property settlement. These are the stock options that were awarded during the marriage, but are not allowed to be exercised by the employee until a date in the future, presumably after the divorce is final.

It is crucial that both parties are fully informed about the grant dates and nature of the stock options when determining the value of the marital portion of the asset. A comprehensive company description of the option plan and calendar of granting and vesting dates, as well as the number of shares and price the employee must use to exercise the option, must be made available to the non-employee spouse to review with his or her attorney. In addition, it is important to determine if the options were granted for services to be rendered after the divorce.

Generally, if the options were granted during the marriage, they are considered marital property because the employee has the right to buy the stock at a fixed option price and then sell the shares at the current higher stock price to make a profit. With already vested options, it is easy to determine their value by looking at the fixed grant price and comparing this price to the current stock price. The difference multiplied by the number of shares is the current value of the vested asset.

But what about granted, though unvested stock options? What happens if these options were granted during the marriage, but will vest and be exercisable in the future, after the divorce? And what if the parties are separated but still married at the time the grant occurs?

Other distinctions include whether the option is performance or incentive-based. It is arguable that incentive-based options, which motivate a person to stay employed at the company, are not based on the employee’s contribution but on some future performance after the divorce. Since some options are granted for service that will occur after the divorce, the employee may feel that the ex-spouse did not contribute to the acquisition of the post-divorce portion of the asset. Fortunately there are ways to discount the future options in the interest of fairness.

If the stock options are going to be off-set against other assets, the unvested options granted during the marriage and based on performance during the marriage can be given a lesser present value than the vested ones by use of a formula which takes the future, post-divorce vesting date(s) into consideration.

Often the uncertainty of whether the employee-spouse will stay employed long enough for the unvested options to actually vest makes it risky to off-set any granted though unvested options against other marital assets. In that case, the parties can consider dividing the proceeds in an allocation that is fair to both, “if and when” the options get exercised.

Tax consequences have to be considered as well, since the exercise of a stock option affects the taxable income of the person who owns the option. Sometimes the company Plan prohibits the transfer of the options even as part of a divorce. But if the options can be transferred to the non-employee spouse to exercise in the future, that spouse will owe the taxes, according to the IRS. With any complicated asset such as stock options, it is important to consult with an accountant regarding the tax implications of exercising or transferring the asset.

What Am I Entitled to When it Comes to Property Division in a Tennessee Divorce?

Clients often ask their lawyers this question and the problem is that each case is made up of a unique set of factors that judges can consider when fairly dividing the marital property.

So many divorcing couples think they have to go to court to get a fair resolution, or any kind of resolution, to these types of issues.

However, going to court (i.e., a litigated divorce) can result in unexpected property divisions, no matter how skilled and experienced your lawyer might be in arguing your case. Therefore, in these matters, one cannot say exactly what you or your spouse is entitled to according to the law.

So, divorcing couples might consider instead thinking about what they, individually and/or together, believe is a fair result, given all the facts and circumstances. If one spouse stayed home and managed the children and household and entertained for fifteen years so that the other spouse could devote all waking hours to increasing the value of a pre-marital business, then perhaps the increase in value should be subject to division, at some reasonable percentage.

I would recommend, if you want to have some control over the outcome of the division of property, you should consider using either Collaborative Divorce or Divorce Mediation,  both of which seek to obtain an out-of-court settlement cost effectively and with privacy. 

Does Everything We Own Get Divided in a Tennessee Divorce?

No. Some property may not be subject to division, if it is “separately owned.” 

Under Tenn. Code Ann. 36-4-121(b)(2) separate property is generally set aside and excluded from being divided in a divorce. Only marital property is subject to division.

Separately owned property may include assets such as: an inheritance, or a gift specifically to one spouse, or a personal injury award,  even if received during the marriage.

It may also include an IRA (converted from a 401k) and/or retirement plan from employment prior to the marriage. Likewise it can include interests in a separate business owned by one spouse prior to the marriage, one that the other spouse does not participate in directly.

In practice, however, the law often is not “black and white” as to whether an asset is marital or separate. There are many distinctions made based in notions of fairness.

Many times what started out as separate property ends up as marital property in nature.

This happens, for instance, when the spouse who did not own the property before the marriage, contributes significantly to the preservation and/or appreciation of the asset during the marriage.

For example, one spouse worked part time on the family farm that the other spouse inherited. Or, both parties contributed to the repairs and taxes of an inherited vacation home. 

Or, an off-site business owned by one spouse before the marriage was made more successful because the “stay-at-home” spouse managed all of the family finances, or took care of the children, or entertained the other spouse’s business clients for many years.

Also, consider a pre-marital IRA worth $100,000 on the wedding date which appreciates to $200,000 during a long marriage. Through there was no direct effort of that spouse in causing the appreciation, it may also be subject to division due to the long marriage.

Finally, it is worth noting that how one asset is divided (or not) could affect whether another asset will have to be divided.  For example, if the family home or business is not going to be sold and divided, then some other asset may have to be sold and divided to accomplish a fair settlement.

These situations illustrate there are many factors that need to be considered before the property divisions in divorce are determined.

Leaving these kinds of decisions up to the court, as in traditional litigated divorce, makes it hard to predict how a judge will rule, since each case is unique and judges have wide discretion to determine what is fair in these matters.

When an out-of-court settlement is reached by means of thoughtful negotiations with advice of a neutral financial expert (such as in the Collaborative Divorce process) it is highly likely to find the division of property that works best for both parties.

How Do Real Estate, Business Interests and Other Assets Get Divided in a Tennessee Divorce? What About Debt?

Every Tennessee divorce requires dividing up of the property you and your spouse have accumulated during the marriage, so you have to know what there is and how much it’s worth in dollars. In other words, when you are divorcing, each piece of property will get translated into a dollar value to make it easier to divide the property fairly.

Real estate, most automobiles and financial assets (e.g.,  business interests, retirement plans, stock options), must be appraised.  Their values may be estimated informally when the parties agree and it is appropriate to do so.

When evaluating the martial estate, many people do not realize that they have to subtract the debt associated with any piece of property, as well as any credit card or personal debt. So, for example, if your house is worth $500,000, but you still owe $300,000, the appraised value of that particular asset for the purpose of dividing up in the divorce is not $500,000, but rather $200,000.

When the total martial estate is evaluated, the sum of all asset values is off-set by the sum of all debt still owed. For more information on handling debt in divorce, please see TN Law Topics on the Division of Debt on this web site.

How is Commission, Overtime or Bonus Income Treated in Tennessee Child Support?

All of these types of income are considered “variable income.”  Variable income gets averaged (e.g., over recent years, as applicable), and added to the monthly income under the guidelines.  But the inclusion of variable income has to be in line with the specifics of your case. If the company employing one of the spouses is having a bad year, or if overtime is no longer being offered, it would be unfair to include the extra income in the calculation.

What Does Child Support Cover? What about Private School?

Child support is expected to cover housing, food, transportation, clothing and entertainment, as well as the costs associated with a public education. The child support guidelines allow parents to subtract certain regular expenses from their respective gross income numbers before the child support amount gets calculated. Tennessee law includes a credit for work-related childcare expenses, for court-ordered child support paid to children from prior relationships, for health insurance costs and for recurring uninsured medical expenses.

Parents can decide to share any of these expenses, so that both would show credits on the child support guidelines worksheet. Special expenses and extraordinary educational expenses such as private school or special needs schooling can be discussed and the allocation of these expenses can be decided upon by the parents. Once the basic child support amount is determined, then parents can add in the costs of extraordinary educational expenses as a deviation from the guidelines.

So, if the guidelines give Mom $2000 per month in child support, but Johnny’s private school is $750 per month for tuition and books, then the parents can decide how to pay for those additional agreed to costs. Dad could pay the expenses directly or could give Mom an extra $750 per month, or the parents could share in the private school costs according to their proportional share of the overall support, depending on their respective incomes. Tennessee Law states that the special expense has to be more than 7% of the basic guidelines amount, which in this example it would be. In other words, the special expense needs to be financially significant.

Does Tennessee Have a Formula for How Much Child Support Will Be Paid?

Tennessee has child support guidelines and worksheets to help determine how much child support will be paid.  The state even provides a web-based tool called the “Child Support Calculator”  that uses the guidelines to determine a child support amount, given the assumptions entered.   

The Tennessee Child Support guideline amounts are not absolutely mandatory and the parents may choose to deviate from the guidelines in order to reach an agreement that meets their family’s specific situation.  Parents can agree to have the paying parent pay more or less than guidelines suggest. However, the law does require that parents who choose to deviate from the child support guidelines explain their reasons per the requirements of the law.  

In out-of-court settlements, such as in the Collaborative Law process, your lawyers will explain your reasons as part of the settlement paperwork submitted to the court, so that the judge can be sure that the best interests of the children are being met.

To access theTennessee child support worksheet and calculator, click here.

To access the Tennessee child support rules, click here.

How is Child Support Determined in Tennessee?

The goal of the Tennessee child support law is to make sure that, to the extent possible, children be afforded the same opportunities available to children of intact families consisting of parents with similar means to those of their own parents.

In other words, children deserve a certain proportion of the income available to both parents. If one parent has less income that the other, the higher-income parent will be expected to transfer funds to the lower-income parent. This is called the “income shares” model, because both parents share in the support of their children. It is based on economic studies of child-rearing costs and the model is followed in the majority of US states.

In addition to actual income, the actual expenses in raising the children are part of the calculation. So, if the lower income parent pays for the children’s medical insurance, those expenses will be fairly accounted for, in the child support calculation.