What is a Property Settlement Agreement?
Property Settlement Agreements are commonly known as PSA’s. Simply stated, a "PSA" is a written contract made between divorcing spouses that settles all or some of their claims arising out of their marriage, including any equitable distribution issues, alimony, child custody, parenting time, medical and educational expenses for the children, and child support. Family Judges, Clerks and Attorney’s frequently refer to PSA’s when they refer to the people "settling their cases". This means that the litigants reached an agreement that resolves all of their disputed issues without the need to go to Court for a trial.
In New Jersey, every divorce must involve a settlement or a trial. When a settlement is not reached, the Judge is obligated to either set a trial date or order the parties to go to mandatory economic mediation.
With the implementation of the Early Settlement Panel, many litigants are not only required to go to this mediation, but there are actually court ordered conferences where Settlement Officers must try to settle the case. If the case does not settle at a Settlement Conflict Resolution Conference, the litigation must result in a trial. There are also cases where the parties are not able to reach a resolution and their case ends up on the economic mediation track .
Practically speaking, so many litigants settle their divorce cases today because it is more cost effective. In addition, litigants have more control over the family property after divorce when they settle their case than when they leave it in the hands of the Court. By entering into a PSA, the parties can meet their needs. It is a smart business decision to settle, and by doing so, it will avoid years of litigation including a costly trial.
Once a PSA is entered by the parties, depending on what issues they resolved, it can range in length from one page to hundreds of pages. When it is signed by the parties, notarized, and then submitted to the court for approval the Judge will usually sign it "on the papers" after reviewing it and determining that it is fair and equitable, and that both parties fully and free entered into it. So long as at least one party is a resident of the State of New Jersey for not less than one year before filing for the divorce, the Judge will have jurisdiction to have personal jurisdiction over the litigants in the Case Information Statement, and the PSA. The Court Clerk will then enter the Judgment of Divorce which finalizes the divorce and incorporates the PSA by reference.
The PSA is a very powerful document. Once it is signed, the parties are no longer able to return to the court to litigate the issues within it without very limited circumstances to do so.
The Essential Components of NJ Property Settlement Agreements
A property settlement agreement is an essential part of the divorce process in New Jersey. A property settlement agreement in NJ is a legally binding contract between the parties specifying how all of the marital assets will be divided and how any children will be provided for after the divorce is finalized, both financially and in terms of custody and parenting time. A property settlement agreement is sometimes referred to by attorneys simply as a PSA and is considered a resolution of all of the issues between the parties and will eventually lead to a Final Judgment of Divorce.
All property that is acquired during the marriage, including assets acquired prior to the entry of divorce, is subject to equitable distribution. What does equitable distribution mean? It means that you are not entitled to get ½ of everything from your divorce. Sometimes it will be ¼, 1/10th or even less depending upon the circumstances. All property should be valued and then divided through a complicated mathematical formula that considers the length of the marriage, each party’s dependence or independence on the other, economic factors and other issues that an experienced matrimonial attorney understands. If the parties cannot agree, and there is no prospect of settlement, the court will consider a number of factors under the statute that governs equitable distribution. The court will then decide how the marital estate will be divided.
The PSA will also contain alimony provisions. Either party may apply for alimony during the divorce proceedings (note that this is not commonly done due to Court backlogs), or sometime after the divorce is finalized. There are several different types of alimony, including rehabilitative alimony, limited duration alimony, pendente lite alimony and open durational alimony. The parties’ incomes determine how much (or if) alimony will be paid. Importantly, alimony payments terminate at the death of either party, the remarriage of the supported spouse, the supported spouse’s cohabitation with a third party or a modification made pursuant to law or court order.
A PSA will also address child support, including the amount of child support to be paid and how the parties propose to provide for the children’s needs. The PSA must properly allocate expenses such as daycare costs, tutoring, or other expenses. Pursuant to the New Jersey Child Support Guidelines, child support is determined using a formula based upon both parties’ incomes, insurance costs, child care expense and other variables.
Lastly, the PSA will contain a custody provision that provides for the parenting schedule for the children. This schedule will list where the child will spend each day of the week, including weekends, holidays and vacations. A visit from a step-parent, aunt or uncle, or grandparent can be included in a schedule. More importantly, if this is a first divorce or subsequent divorce with a different spouse, there should be a plan for detection and prevention of child abuse.
Evaluating a property settlement agreement requires expertise in many areas under New Jersey family law, including domestic violence and child abuse detection.
What the Law Says About Property Settlements in New Jersey
The legal framework regulating the enforcement and determination of "equitable distribution" of marital property in NJ is mainly governed by the New Jersey Statutes Annotated, N.J.S.A. 2A:34-23.1 – 2.A.34 – 23.8. Specifically, it provides that the Court adjudicating a divorce matter shall have the power to "direct how much or what part of the other’s property is to be transferred or given to the other." The statute goes on to say that the former marital property "does not need to be physically divided … and provision may be made by way of cash … or by way of supervision."
Pursuant to the New Jersey Supreme Court’s decision in Painter v. Painter, 65 N.J. 196 (1974), a "marital estate" is defined as "all the property, both real and personal, tangible or intangible, which is legally and beneficially acquired during the marriage by all parties through an exchange of effort, whether that effort takes the form of direct labor, contributions to child care or household management, or efforts directed at garnering income or assets through investment or other commercial efforts." Thus, the presumption is that all property acquired by either party during the marriage is eligible to be classified as part of the marital estate.
Within the "marital estate" the New Jersey Legislature expressed the presumption of "equitable distribution" as follows: "apart from any allowance in lieu of alimony," a spouse can either receive: (1) a percentage of the marital estate; or (2) specific items of property "subject to the equitable powers of the court with respect to tax and any other differences for each party’s liabilities, debts and other obligations." However, "equitable distribution does not include property acquired by one party as a nonmarital asset or property which represents passive income from a nonmarital asset acquired before the marriage or during its existence, or property acquired in exchange for such property." In this context, "passive income" is defined within the statutes as "income that results from passive gains from active investments, market or economic conditions," as opposed to income arising from "labor, efforts or toil."
Under the New Jersey divorce laws, the general law is that all marital assets should, if possible, be equally distributed between the divorcing parties at the time of divorce. However, the court may make unequal distribution if the parties agree to it either in the form of a property settlement agreement, or based upon other "good cause" that can be shown to the court. The exception to the general rules is for divorced parents to be awarded "joint legal custody" and then share physical custody of their children. Such award must be based upon the best interest of the children. New Jersey Statutes N.J.S.A. 9:2-4 (to determine custody of children) and N.J.S.A. 9:2-5 (to determine allocation of parenting time) must be followed.
How to Create a Property Settlement Agreement
The process of drafting a property settlement agreement begins when the spouses’ attorneys have determined which issues are agreed upon and which ones are disputed. Generally, the following items are required to be addressed in a Property Settlement Agreement in NJ: the division of marital assets and debts, arrangements for minor children such as custody, parenting time and child support, the issue of spousal support/alimony, if any, and a waiver and release provisions. In order to draft a legally binding Property Settlement Agreement that will be enforceable in a New Jersey court, we will typically set up a mediation or settlement conference to address each disputed item that is not addressed in the parties’ trial memorandum. We afford the parties the opportunity to "air" their respective positions, concerns and goals, and generally we follow up with a summary letter advising the clients of the offers made at the mediation. If the parties are receptive to the negotiator’s recommendations, the mediator or special master will put pen to paper and draft the Property Settlement Agreement, which will then be reviewed by my client, and then either revised or submitted to opposing counsel or the mediator for review and further revision. Sometimes, the parties prefer to go back and forth until they arrive at a final draft that is satisfactory to both sides. However, more often than not, the parties will put the finalized draft on hold for a few weeks to allow them to digest the terms and then resume settlement negotiations until an agreement is reached.
Common Mistakes made by NJ Parties in Property Settlements
The preparation of a NJ property settlement agreement is typically a long process from start to finish. Some of the mistakes made in the drafting of the agreement are very simple, but have far-reaching implications. Below are some of the common pit-falls and mistakes made by couples in NJ when preparing a property settlement agreement:
You and your spouse must each have an understanding of your net worth, based upon assets and liabilities you hold jointly and individually. The completion of a Case Information Statement is one of the best ways to do this. You are required to make full and complete disclosures of your assets and debts during the divorce process. If either party intentionally does not disclose an asset or debt, it is grounds for the Court to set aside the entire settlement agreement in the future. I also always recommend that parties obtain a credit report to be sure there are no undisclosed marital debts.
A plain language approach is always best. If you or your spouse do not understand something, ask questions . Many times this will be the most significant contract that the parties enter into, and if there is a dispute in the future, it may cost thousands of dollars in attorney’s fees to resolve. Be sure that you have an understanding of any support obligations and how they will be calculated. The use of spread-sheets is effective as this way you will always know what your support obligation is each year.
In NJ, parents have the ability to claim the dependency exemptions on their taxes. A plan for claiming the exemptions should be well thought out prior to the entering into a property settlement agreement. The exemption may be split for support purposes. For example, mom may get the exemption in one year, dad may get the exemption in the following year, or they may alternate. This has significant tax ramifications for both parties.
You should try to resolve as much as possible with your spouse without going to Court. Having attorneys involved in the process increases costs. When you and your spouse can agree on issues, prepare the language in the Agreement yourself. While a lawyer can always make changes, this will save you money. This is particularly useful in cases where child support will not be ordered.
Amending a NJ Property Settlement Agreement
In New Jersey, a property settlement agreement (PSA) can be modified after final judgment of divorce in specific circumstances. Modifications commonly arise if one or both parties experience a change in financial circumstances, such as loss of employment or a sudden increase in income due to a promotion in the case of alimony. Additionally, if joint legal custody is an option for the parties, a request for modification can be made should visitation (parenting time) become too burdensome for one party. New Jersey courts will only modify the award of alimony and equitable distribution, however, based upon a demonstrated changed circumstance that alters the net worth of either party.
In cases in which the parties themselves are able to come to an agreement regarding the modification, the parties need only to submit the modification to the Court in the form of a Consent Order. In such cases, it is not necessary for the parties file a Motion with the Court providing notice to the other party. A Motion is typically only required in cases in which one party is not in agreement with the proposed modification. If that is the case, the moving party must provide the Court and opposing party with sufficient notice of the Motion prior to the date of the hearing before the Court.
Enforcing a NJ Property Settlement Agreement
The court system allows for the enforcement of equitable distribution agreements when one person to the agreement does not act according to what is defined in the agreement. The court does not necessarily enforce the property settlement agreement itself; rather, the court enforces the equitable distribution that is specified in the agreement. Therefore, it is very important to make sure that the equitable distribution terms are clearly defined in the agreement.
For example, a typical issue that arises with property settlement agreement enforcement is the failure to abide by the sale of real property. If the marital residence is to be sold and the net proceeds divided pursuant to the property settlement agreement, the buyer provides the funds to the seller at closing from the sale, and the net funds are paid to the parties directly thereafter. Typically, the parties should not disperse those funds without express, written, permission of the other party, because a court will not look favorably upon the distribution of those sale proceeds if there is no clear, written understanding as to how the proceeds are to be disbursed. For instance, there would be an understanding that the parties would not use those funds for another purpose, absent express permission from the other party.
If the equitable distribution agreement provides that the parties will retain the marital residence , and one party is entitled to buy out the other, it should also be clearly defined as to how that party may buy out the other. If the parties deal with real estate agents, then the sale of the real estate can frequently become a source of conflict. Instead of going through the hassles of litigating and dealing with the court system, if the parties expedite the property settlement agreement as that agreement pertains to equitable distribution of the real estate, then the specific terms of the agreement can be upheld.
For example, if the parties agree to sell the marital residence and split the net proceeds from the sale evenly, and one party refuses or unreasonably delays in the sale of the marital residence, the other party seeking the enforcement of the property settlement agreement may ask the court for permission to sell the property on his/her behalf, without the other party’s consent or approval.
The court has the power, by way of the Agreement, to wrap around the Enforcement Motion, any and all equitable devices available to them to make the other party comply. Some of these devices may include an Order compelling the sale of the asset(s) AS IS, and the equitable distribution of the proceeds or value of the property pursuant to the Agreement.