Debt and Divorce in Texas

Generally speaking, if you are getting a divorce, two subjects should be at the top of your list of important ones to consider before beginning your case. The first is children. If you are a divorcing parent, then your kids and your rights to make decisions on their behalf, your ability to spend time with them, and how you can support them should be paramount. From my experience representing folks in divorce cases, every other issue will take a back seat to your kids.

The other critical subject that you should be aware of as you head into a divorce case is property. Property can be subdivided into two columns: community property and separate property. Community property is a property that you and your spouse acquired during your marriage. This is income from your jobs, property that you purchased, or improvements made on that property. In Texas, there is a presumption that all property owned by you and your spouse during a divorce is community property.

To buck the community property presumption and prove that a piece of property or income is separate, you must be able to show that you owned the property/income before your marriage. However, suppose the property was acquired during your marriage, and you can prove that it was gifted to you as an individual or inherited by you as an individual. In that case, these circumstances will also overcome the community property presumption.

Amid this discussion, we have not brought up the dreaded word “debt” yet. Suppose you are anything like most families in the United States. You have not only some debt but a great deal of debt. These types of debt can range from credit cards to mortgages and all sorts of accounts and lines of credit in between. Much of the day that you may have accumulated has been in place since before your marriage, but some of it came about due to joint decisions made by you and your spouse.

In today’s blog post from the Law Office of Bryan Fagan, PLLC, I would like to share some thoughts with you on this topic. Since debt is a reality for most of you reading this blog, it needs to be discussed much more than now. Property may be more fun to talk about, but from my experience, many people have more debt than property as you enter into a divorce. This is especially true if you are a younger individual going through a divorce. If you have ever wondered what will happen to your debt when you file for divorce, you need not wonder anymore.

Does community property mean that there is a thing called community debt?

We spent a great deal of time in the opening section of today’s blog discussing the basics of community property law. It would make sense on many levels for there to be community debt.

When we discuss debt in the context of a Texas divorce, the best way to think about it is that the debt you or your spouse has incurred will continue after the divorce with the person who owns the property the debt is attached to. For instance, if a loan were taken out on your vehicle last year, that debt would go to you after your divorce is finalized. Let’s discuss just how this happens.

If you went to a car dealership and purchased a vehicle on credit, then you signed a great deal of paperwork that obligated you to pay the creditor for your car loan a certain amount of money per month in the form of a car payment. If you went down to the dealership, purchased the car, and financed the car through the dealership without your spouse’s signature appearing on loan, then that debt is yours. You are responsible for it during your marriage, and it will be yours after the marriage as well.

When do you become responsible for your spouse’s actions if they take out a loan?

I think the previous example that we discussed with the car purchased on credit is pretty straightforward. Now we will venture into murkier waters. If your spouse takes out a loan in their name but does so to pay for items related to raising your children or the upkeep of your home, your spouse was acting on your behalf in taking out the loan. You could be responsible for the loan even if your name does not appear anywhere in the loan’s paperwork.

Who is managing the property that the debt is associated with?

To figure out who will ultimately be responsible for a particular debt in your life, you will need first to determine which person, you or your spouse is actually in control of the property associated with that debt. The State of Texas treats your separate property, and community property that would have counted for the separate property had you never gotten married as property of which you have exclusive control. Think about your income or money you win in a lawsuit as examples of this sort of property.

Any other community property other than the kind we just listed in the paragraph above is jointly controlled by you and your spouse under Texas law. The best way to counteract this presumption under the law is to agree to a post-martial agreement where you and your spouse can move property into different columns as you see fit.

The type of creditor matters when determining who is responsible for a debt

Now that we have covered the type of property you could be on the hook for paying debt on let’s go over the type of creditors out there in the world. Not all creditors are created equally, as we shall see in a moment.

If you have a credit card with a balance on it, have taken out a loan from a bank, or have a mortgage, then you have a relationship with a contract creditor. To get the money you want to purchase items on credit, you had to sign a contract with the creditor wherein you agree to the debtor/creditor relationship terms. The interest rate you are to pay, the length of time you have to pay the financed sum back to the creditor, and other legalities are covered in a contract of this sort.

The other and less frequently encountered type of creditor is a tort creditor. Unless you owe someone or something money due to their successfully having sued you and won a money judgment against you, these types of creditors are probably not going to be a part of your divorce.

Tying it all together

The type of creditor and which spouse controls the debt will determine who is responsible for that debt after the divorce has been decided. If you, as the husband, owe a contract creditor a debt on your separate property, prepare to keep that debt as yours 100% after the divorce. The same can be said for those “Special” types of community property debts discussed briefly above. If you have a community property debt, but that property is controlled solely by you, that is going to be yours as well. The only type of property that your wife would be subject to paying on would be jointly controlled community property. Her separate property or solely managed community property would not be involved in discussing debts taken out in your name.

What does this all mean? For starters, if you took out a loan in your name on a car and that car was awarded to your spouse in the divorce, you are still responsible for that car note. So if the creditor repossesses the car for not having received payment on the note, your spouse may be out of a vehicle, but your credit score will take a dip for this having occurred. This is an important concept to understand as you begin a divorce. Consider how you will negotiate and how the effects of that negotiation can impact you directly and indirectly.

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