Who gets stuck with the debt?

You may be thinking that since there is community property, there must be community debts as well. A lot of people think this. A lot of people are mistaken. The general rule in Texas is that debt (or liability) attached to an asset goes to the person who manages that asset or is responsible for that debt. There are two ways to be responsible for a debt: directly or indirectly.

When you sign a contract (like a financing agreement) that obligates you to pay money to a creditor, you become directly responsible for that debt. Say you signed financing paperwork with the electronics store when you bought your new computer. Your soon-to-be-ex didn’t sign the papers. This means you (and only you) are directly responsible for that debt.

Indirect liability is a bit more complicated. Under the Texas Family Code, a person is personally liable for the acts of the person's spouse only if: (1) the spouse acts as an agent for the person; or (2) the spouse incurs a debt for necessaries. A spouse does not act as an agent for the other spouse solely because of the marriage relationship. This means you can only get stuck being responsible on a debt that your soon-to-be-ex acquired if you gave him/her the authority to take on that debt on your behalf, or if the debt is for a "necessary."e;

The Texas Family Code has this to say about "necessaries":

"Each spouse has the duty to support the other spouse. Each parent has the duty to support his or her child during the period that the child is a minor, and thereafter as long as the child is fully enrolled in an accredited secondary school in a program leading toward a high school diploma until the end of the school year in which the child graduates. A spouse or a parent who fails to discharge the duty of support is liable to any person who provides necessaries to those to whom support is owed."

While what is "necessary" in your particular case may not be the same as what is "necessary" in another case, you can generally be sure it includes food, clothing, shelter, and medical care. Most medical care, that is. No matter how necessary you thought your liposuction was, the court will not likely find it to be so.

That deals with the issue of who is responsible for a debt. This tells us who will be on the hook for payment. The issue of who manages an asset tells us what property can be taken away to pay off a debt. Remember back when we talked about "Yours, Mine and Ours"? Well, now we have to talk about the sub-categories of "Ours, but he takes care of it," "Ours, but she takes care of it" and "Ours that we both take care of."

With the exception of homestead property (a whole new discussion in and of itself), each spouse has the sole management, control, and disposition of: 1) his or her separate property; and 2) the community property that WOULD HAVE BEEN his/her separate property if he/she never got married. Your salary, revenue generated by separate property, and money won in a lawsuit for personal injuries are examples. This is sometimes called a spouse’s "Special" community property. All other community property is subject to the joint management, control, and disposition of the husband and wife. You, of course, can make a written agreement with your spouse (while married) to make any community property asset into "special" community property.

I will explain what property your creditors can take in the same way it was explained to me in law school. Hang in there! First, there are two basic types of creditors: contract and tort. Contract creditors are the kind you normally think of: credit card companies, banks who loaned you money, mortgage companies, etc. Basically they are people you borrowed money from and agreed to pay back. Tort creditors are people you owe money because they sued you and won a money award against you in court.

We take these two kinds of creditors and the five (yes, five) categories of property and make a nice chart. The chart below assumes that the Husband (only) is responsible for the debt:

 

Contract Creditor

Tort Creditor

Husband’s Separate Property

Can get 100% of this

Can get 100% of this

Husband’s Special Community Property

Can get 100% of this

Can get 100% of this

Joint Community Property

Can get 100% of this

Can get 100% of this

Wife’s Special Community Property

Can get 0% of this

Can get 100% of this

Wife’s Separate Property

Can get 0% of this

Can get 0% of this

 

If the Wife only was responsible for the debt in question, well…Just switch where it says "Husband" for "Wife". If you are both responsible for the debt, your creditors can get at everything. Here’s a little disclaimer: the ability to actually take property to satisfy a debt is limited by the Texas Constitution, the Texas Property Code, and the Texas Insurance Code. Details on this issue are beyond the scope of this guide.

Why do we care who manages what when the judge is splitting things up for us? The judge cannot divide and transfer title to property if it will defraud your creditors. Translation: You can’t get around the debt you owe on a piece of property by making sure your ex gets it in the divorce!

Now maybe you’re thinking, "Well, if the bank repos the car that my ex got in the divorce, isn’t that his (or her) problem?"No, it’s yours. Yes, the ex is now out a car, but it’s YOUR credit that just went down the drain. If you were responsible for the debt and the asset was community property, no matter who gets it in the property division, your credit is on the hook. One of my best friends from law school had this happen to him. His ex got the house. She stopped making payments on the house. He now can only get a loan from his mom.

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