In your divorce, debt will either be divided up into the column of community debt or will count as separate debt belonging to you or your spouse individually. The general rule that an attorney will tell you is that you and your spouse are responsible for debts incurred during your marriage. What is generally not relevant is who took the loan out, used the credit card, or spent the money. If the property was purchased with the debt, such as a new car, the party awarded the vehicle is almost always awarded the debt associated with that car.
Remember that what is decided in the divorce is not what a creditor will look to when determining which person is liable for that debt moving forward. Let me illustrate this point with an example. Suppose that you and your spouse purchase a home together with the assistance of a home mortgage. The loan will have been taken out in your name and that of your spouse. Legally, you and your spouse are both liable on that loan. It doesn’t matter if the divorce decree awards the debt to your spouse alone- you would still be responsible on the note. You would need to undertake additional steps to remove yourself from liability for paying the mortgage legally. The divorce decree alone will not cause the creditor to find you not liable.
I want to cover four types of debt before we go any further with this discussion. Those four types of debt are secured debt, unsecured debt, debt associated with your divorce, and tax debt.
What is secured debt concerning a divorce?
A creditor may repossess the property if you default on a loan. If you stop making payments on your car note, you will find that the owner of the message (the creditor) will show up at your house with a tow truck and take away the vehicle. Likely what will happen is that the car will be sold at wholesale prices, and you will be sued for the balance owed on the note. The same process would be followed if you owed money on a boat, recreational vehicle, or even your home.
Suppose you have a loan in both your name and that of your spouse. You will need to make sure that it is clear which spouse (if any) will be responsible for making payments on the house note moving forward in your final decree of divorce. This is the first step towards establishing liability on the message. The second step is even more critical. The spouse who gives up ownership rights in the house should execute a special warranty deed that transfers their ownership share in the home to the other spouse.
If you keep the home, you will sign off on a deed of trust to secure the assumption. This document allows your spouse to foreclose on the house and take over payment responsibility if you fall behind in your mortgage payments. That way, they are covered if you fail to live up to the payment requirement outlined in the original deed of trust and the final decree of divorce.
What is unsecured debt about a divorce?
As opposed to secured debt, a lender who is owed unsecured money cannot repossess any property to compensate themselves for money owed on loan. Credit cards, personal loans, and lines of credit are examples of unsecured debts. If your mother, father, or another relative has loaned you and your spouse money, this type of loan would likely be unsecured, as well.
What is tax debt concerning a divorce?
If you and your spouse have filed your taxes jointly, you are both liable for paying any taxes owed based on that return. An audit can be performed for up to three years after your tax return is filed. These audits can occur randomly, so you should keep your paperwork handy for at least that long. Your final decree of divorced should specify what will happen if any additional penalties, interest, or taxes are imposed for any prior year that you filed taxes with your spouse.
What are expenses associated with divorce about your divorce?
If you haven’t heard, divorces can be expensive. It happens that sometimes you or your spouse will seek an order from the court that seeks to have the other spouse pay your attorney’s fees. For instance, if you have been a stay-at-home parent for many years and have no source of income independent of your spouse, it may be reasonable for a judge to order your spouse to pay your attorney’s fees. This is especially true if your spouse was the party to file for the divorce or is at fault for having caused the divorce.
On the other hand, it could be that both you and your spouse work and that both of you have the money to pay for an attorney. In situations like that, you will need to be clear about which party pays what attorney’s fees in the final decree of divorce. Parties will typically agree that each spouse will pay their individual attorney’s fees for the most part. The circumstances of your case will determine who pays attorney’s fees.
Another expense commonly associated with a divorce would be any expenses related to appraising a family business, appraising your home, or hiring a child custody evaluator or someone like that. These are “add-ons” that are not necessary for every single divorce but may be required in yours. As such, you will need to determine which of you will be responsible for paying what part of those bills. Often the parties to a divorce will split these bills right down the middle of your incomes are similar. If you earn a great deal more than your spouse, it could be that you decide to apportion the bill according to your income.
Keep in mind that your spending during the divorce could become an issue in the case. For instance, I have seen spouses take credit cards and spend thousands of dollars on that card. Since this is Texas, their thought was that the debt would be divided up evenly between the parties. I would caution you against doing and thinking this. For one, the temporary orders in your case likely bar you from making unnecessary charges on a credit card during the case. Think of the essentials to your life and consider spending only on those items. Frivolous or luxury items purchased during the divorce will likely become the responsibility of the spouse who makes that purchase.
Community debt: credit cards
If you and your spouse both have permission to use a card and make purchases, then either of you can be held responsible for up to 100% of the debt. There is no cap at 50% just because you and your spouse both have your names on the account. If you are an authorized user, you can make purchases using the card but are not legally liable for the debt. You can be assigned the obligation by the divorce court, however.
Suppose that you and your wife are working on getting a divorce in Texas. You handled all the financial matters during your marriage, such as earning an income and paying the bills. Your wife stayed at home with the kids.
During the discovery phase of your case, where each of you sends requests for information to the other party, your wife learned that you used your jointly held credit card for upwards of $30,000 to purchase luxury items that benefited only you. We’re talking about suits, upgrades on flights for business, enhancements for your car, new golf clubs, etc. Since we live in Texas, your spouse may be liable for half of that debt since it was a jointly held card. If you are awarded half of the debt but fail to make your payments, the credit card company can legally come after you for the total debt owed.
What if your spouse has filed for bankruptcy?
If your ex-spouse files for bankruptcy, you need to know that their doing so could impact you in the future. Much of the potential impact on you will depend upon the type of bankruptcy that your spouse chooses to file, Chapter 7 or 13, as well as the kind of debt that your spouse owes. Spousal maintenance and child support payments are protected from being discharged in bankruptcy. If your spouse has filed for bankruptcy or considering doing so, I would contact a bankruptcy attorney to speak to them about these issues.
How will the debt be divided in your divorce?
So far, we have been speaking on a theoretical level about debt and divorce. Now I would like to turn the page and discuss how you may encounter debt in your specific case.
You and your spouse will have a handful of options at your disposal in connection with your debt and your divorce. The first option would be to sell any property that is a part of the community estate to pay off owed debts. For anyone adverse to having debt on the books, this would be a great option. Imagine a scenario where you scrimp, save and then sell items to make sure your ledger is clean coming out of a divorce. If you have the property to sell, this would not be a bad option to pursue.
Next, you could agree to take on the liability and responsibility for most of the debt. In exchange for taking on more of the debt load, you would then negotiate for a higher proportion of the community property. This would even up the scales of justice. Likewise, your spouse could agree to this sort of arrangement. In the alternative, each of you could decide to take on half of the debt and then be awarded half of the community property. This latter option would be the one that most people opt to take in connection with their divorce.
The final option that I think may be relevant for you or your spouse would be appropriate if either one of you is a stay-at-home parent. In that case, the non-stay-at-home parent may be ordered to pay most of the spousal debt and have the responsibility to pay spousal maintenance on top of that. In this situation, courts sometimes consider you have sacrificed earning potential due to your willingness to stay at home with the kids and the house. Your spouse would shoulder more of a financial burden but has a more significant potential to earn an income and is better suited to pay down the debt than you would be. Again, before you know how anything in your case is likely to go, I recommend speaking to a family law attorney about your specific circumstances.
Questions about the material presented in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material presented in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free-of-charge consultations six days a week here in our office. These consultations are an excellent opportunity to ask questions and receive direct feedback about your particular circumstances. Thank you for spending part of your day with us, and we hope you will join us again tomorrow.