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 both you and your spouse are responsible for debts that are incurred during the course of your marriage. What is generally not relevant is who took the loan out, who used the credit card or who spent the money. If property was purchased with the debt, such as a new car, the party who is awarded the car is almost always awarded the debt associated with that car.
Keep in mind that what is decided in the divorce is not what a creditor will look to when determining which person is liable on 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 liable on the note. You would need to undertake additional steps to legally remove yourself from liability for paying the mortgage. The divorce decree alone will not cause the creditor to find you not liable.
There are four types of debt that I want to cover 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 in relation to a divorce?
A creditor may repossess property in the event that you default on a loan. If you stop making payments on your car note, you will find that the owner of the note (the creditor) will show up at your house with a tow truck and take away the vehicle. Likely what will happen is that the vehicle will be sold at wholesale prices and you will be sued for the balance owed on the note. Basically, the same process would be followed if you owed money on a boat, recreational vehicle or even your home.
If you have a loan that is in both your name and that of your spouse you will need to make sure that in your final decree of divorce it is clear which spouse (if any) will be responsible for making payments on the house note moving forward. This is the first step towards establishing liability on the note. The second step is even more important. 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 are keeping the home you will sign off on a deed of trust to secure assumption. This document allows your spouse to foreclose on the home and take over payment responsibility in the event that you fall behind in your mortgage payments. That way he or she is covered in the event that you fail to live up to the payment requirement set forth in the original deed of trust and in the final decree of divorce.
What is unsecured debt in relation to a divorce?
As opposed to secured debt, a lender who is owed money that is unsecured does not have the ability to repossess any property in order to compensate themselves for money owed on a 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 in relation to a divorce?
If you and your spouse have filed your taxes jointly then you are both liable for paying any taxes that are 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 in relation to 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 as to which party pays what attorney’s fees in the final decree of divorce. For the most part, parties will typically agree that each spouse will pay their individual attorney’s fees. The circumstances of your case will determine who pays attorney’s fees.
Another expense that is commonly associated with a divorce would be any expenses associated with 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 in every single divorce but may be necessary in yours. As such, you will need to determine which of you will be responsible for paying what part of those bills. Often times the parties to a divorce will split these bills right down the middle if 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. Their thought was that since this is Texas the debt will 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 then you can make purchases using the card but are not liable for the debt, legally. You can be assigned the debt by the divorce court, however.
Suppose that you and your wife are working to get a divorce in Texas. During the course of your marriage you handled all the financial matters 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 requests for information are sent by each of you to the other party, your wife learned that you used your jointly held credit card in 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 is legally able to come after you for the full amount of debt that is 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 type of debt that your spouse owes. Spousal maintenance and/or child support payments are protected from being discharged in bankruptcy. If your spouse has filed for bankruptcy or if you are considering doing so, I would contact a bankruptcy attorney to speak to them about these issues.
How will 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 start to discuss how you may encounter debt in your specific case.
There a handful of options that you and your spouse will have 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 in order to pay off debts that are owed. For anyone who is adverse to having debt on the books this would be a great options. Imagine a scenario where you scrimp, save and then sell items in order to make sure your ledger is clean coming out of a divorce. If you have property that can be sold 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 be able to negotiate for a higher proportion of the community property. This would even up the scales of justice, so to speak. Likewise, your spouse could agree to this sort of arrangement. In the alternative, each of you could agree 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 relevant 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 as well as having the responsibility to pay spousal maintenance on top of that. In this situation, courts sometimes look at things as you having 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 greater potential to earn an income and is better suited to pay down the debt than you would be. Again, before you can know how anything in your case is likely to go I would 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 that was 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 a great opportunity for you to ask questions and receive direct feedback about your particular circumstances. Thank you for for spending part of your day with us and we hope you will join us again tomorrow.