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.