Very few families go through life these days without debt. The fact is that many divorces occur because of the financial stress debt causes to a relationship. This means debt is a common issue that must be dealt with in any divorce case.
This article provides an overview of how debt is handled as part of a property division during a divorce.
No Such Thing As Community Debt
Texas is a community property state, however, there is no such thing as community debt.
Debt usually belongs to the spouse that incurred the debt, or if it was incurred jointly, to both spouses. However, allocating debt between the spouses and ordering a spouse to pay a debt is within the discretion of a court dividing property in a divorce case.
Most divorce decrees will allocate debt to the party that incurred the debt or to the party receiving an asset that was purchased with the debt.
Creditor’s Rights Not Affected By Divorce
At the conclusion of your divorce case, you will have a Final Decree of Divorce that allocates the debts between you and you former spouse. However, many people are surprised to learn that the Final Decree of Divorce is not binding on a creditor.
This means that even if your spouse is ordered to pay a debt you could still be personally liable.
Let me provide a common example. Husband and wife both sign loan documents to purchase a house. As part of the divorce, the court awarded the house to the wife and ordered her to pay the mortgage.
However, wife is unable to make the mortgage payments after a few months and the house goes into foreclosure. Even worse, the house was upside down and sells for less than the mortgage balance.
Husband is then surprised to get sued by the lender for the deficiency. Husband is even more surprised to learn that the divorce decree did not absolve him of liability to the lender despite the fact that his wife was ordered to pay the debt.
This issue arises with automobiles as well.
Reimbursement Claims for Debt Paid During Divorce
Another common issue surrounding debt in a divorce case arises when one spouse has significant debt prior to the marriage that is paid off during the marriage.
At the time of divorce, the non-debtor spouse feels like the debtor spouse received a windfall from the marriage because that debt was paid off with community funds earned during the marriage.
What recourse does the non-debtor spouse have?
It’s called a reimbursement claim. In the context of debt, reimbursement claims arise when community assets or one spouse’s separate assets are used to pay down principal on debt that another spouse incurred prior to marriage.
Identifying, valuing, and accounting for those reimbursement claims is an important part of dividing property in a divorce.
Protecting Yourself From Debt After Your Divorce
So how do you protect yourself from the scenarios discussed above?
There are a number of tools. For example, if your spouse is ordered to pay a joint debt, then you could also ask that he or she be ordered to refinance that debt within a certain period of time.
But what if your spouse cannot qualify to refinance the debt?
There may be other options. For example, if the debt is associated with real property, then you could use a deed of trust in lieu of assumption to protect yourself. This gives you a security interest in the property (secondary to the primary mortgage) that allows you the right to notice of any default and the right to cure.
The bottom line is that debt is something you must take extra care to protect yourself from as part of your divorce.