By Stacey Langenbahn, J.D., Attorney-Mediator
In Texas divorce, figuring out a division of community property and debt (who gets what and who pays for what) is one of the hardest and most confusing things spouses must do. Very simply, there are two ways to do it. The first is the best and least expensive, the second should only be used as a last resort.
- Share accurate information about what you own and how much you owe and negotiate with professional help an agreement between yourselves that meets your individual needs and personal finances going forward; or
- Only when you've unsuccessfully tried everything else should you give the decision of how much money you will have to an overworked judge who, even if he or she wanted to, does not have the time or energy to learn the many details of your finances or to tailor a property and debt plan to fit your family.
If the idea of dividing property and debt on divorce overwhelms you, you are not alone. In most marriages, one spouse has more knowledge of finances. Even if you are the one with that knowledge, it can be daunting figuring out what you have, where it is, how much it is worth, what you owe, whether it is community or separate property and debt, and how to split it. Having an attorney-mediator who knows the law and an optional neutral financial professional on the couple’s team can make dividing marital property and debt equitable, less stressful, and more cost efficient for everyone. There are many laws and taxes affecting the real value of property awarded to each spouse that most people do not take into consideration. This article gives basic information about property and debts and what happens in divorce in Texas along with tips to help you make the right decisions.
Détente Tip: Don't be tempted to make hasty decisions to give away property to your spouse or to take on more debt than you can handle "just to get it over with". Once your property settlement is approved by the judge in your divorce decree, it is very hard to undo. The spouse who later changes his or her mind must prove the agreement was illegal, or the other spouse committed fraud, or forced the spouse to sign the decree under duress or coercion. That battle can take a long time and be costly. And there is no guarantee you will win.
What are the steps to divide property and debts in Texas?
Most people don’t have any idea what a difference it makes to their financial futures after divorce that they live in a “community property” state like Texas. There are three steps to property and debt division on divorce:
- Characterize - is the property or debt community or separate?
- Value - what is the property worth; how much is the debt?
- Divide - how will the spouses divide or allocate the property and debts between them?
What are community and separate property in Texas?
There are two types of property and debt married spouses may have: community (owned by both) and separate (owned by only one). It surprises most people to learn that it does not matter whose name the debt or property is in. Everything either spouse owns or owes is presumed by law to be the community property and community debt of the couple unless a spouse can prove otherwise by clear and convincing evidence.
Separate property is:
- Anything owned before marriage and the appreciation or increase in value of that property
- Inheritances or gifts (from others or from a spouse)
- Personal injury damage awards (except for loss of earnings)
- Property exchanged for other separate property
Community property is:
- All property other than separate property acquired by either spouse during marriage (including wages)
- Income, rent, or interest earned on separate property
What kind of agreements can we make in mediation about division of community property?
When you mediate the division of community property and debt, you and your spouse can decide for yourselves what is community and separate property, how much it is worth, who gets what or what part, and whether any debts or liens the property has (car loans, mortgage) will be paid by the one who gets it, by the other spouse, or by selling the property. Having an attorney-mediator who knows the law and an optional neutral financial professional on the couple’s team can make dividing marital property and debt equitable, less stressful, and more cost efficient for everyone. Agreements allow you to avoid the high cost of litigation, make a "doable" plan, and eliminate the high probability you will not be happy with a judge’s decision.
Your Détente mediators will ask you to list in a worksheet your property, assets, and debts. If either spouse wants it, he or she may request the listing in a formal, sworn "Inventory and Appraisement". This document can be used later in court if you cannot reach agreement in mediation.
Most of the time your Détente mediators can guide you through the process of gathering information about assets and debts, and the negotiation of their value and how to divide them fairly to suit your needs and situation. More complicated property settlements or disagreements about the value of a home, business, investment, retirement plan, pension, or stock option may require the assistance of a neutral certified divorce financial analyst ("CDFA") or certified public accountant ("CPA").
What happens if you cannot reach agreement on a division of property and debt in divorce?
Statistically, 96% to 98% of couples will reach agreement on a division of property and debts by themselves or with the help of a mediator, a financial professional, or lawyers. Only 2% to 4% of divorces go to trial with a judge deciding for them. A judge can only divide community property in divorce and cannot award the separate property of one spouse to the other. However, after hearing evidence from the spouses and often from experts, the judge can decide whether property is separate or community and determine its value. In addition, a judge may consider the value of one spouse’s separate property and the contributions the other spouse made to the separate property (for example to improve or maintain it) when he or she divides up the couple’s community property and debt.
The judge’s division of community property and debt must be “just and right”. Keep in mind that “just and right” does not necessarily mean “equal”. When making a “just and right” division, a judge may consider among other things how much money each spouse makes and is capable of making; the type of community property and the debts associated with it; the amount of separate property each spouse owns; and fault for the failure of the marriage.
Détente Tip: It is helpful to know that Texas judges in a litigated divorce will infrequently award a 60/40 split and only very rarely will award a 70/30 split in truly extraordinary cases. You can also bet a 70/30 award or even a 60/40 award will be appealed. However, a judge is very likely to approve whatever split you and your spouse agree to. When deciding whether to go to court or to accept a less than perfect property settlement that your spouse proposes, be sure to weigh whether fighting for an uncertain property division and risking appeal are worth the cost of attorneys' and experts' fees, your time and energy, and the potential long term damage to family relationships it can cause.
More Divorce Asset and Liability Tips from Stacey Langenbahn, J.D.
- Beware of well-meaning family and friends who try to convince you not to negotiate a property settlement directly with your spouse if the spouse has been unfaithful, drinks, or views pornography for example. Many people mistakenly believe a judge would award you a greater share of the assets and give the other spouse more of the debts as a way to “punish” the other spouse for “bad” or “immoral” behavior. This simply is not true. The reality is that a plan to reveal these things publicly in court just to make the other spouse look bad can backfire badly. Severely damaging his or her reputation often results in the loss of a job and of other career opportunities. If this happens, the spouse will be unable financially to support the family after divorce or to pay alimony. That is not good for anyone. Many times these things can be dealt with privately in mediation instead.
- What goes around comes around. If you make false accusations, don't be surprised when your spouse fires back at you with his or her own. If the alleged behavior of either spouse could affect the well-being of children, the judge will order a social study of both of you and your innocent children get caught in the middle.
- Consider how taxes will affect the actual amount of the settlement you receive. If you are not absolutely sure, consult with a financial professional familiar with divorce tax laws before you complete your negotiations and certainly before you sign a binding mediated settlement agreement ("MSA") or divorce decree.
- So long as your name is on the house mortgage, the car loan, the credit cards, or on any other debt, you are legally responsible to pay even if the judge orders the other spouse to pay all of it. It does not matter to a creditor that a judge gives the property and the debt to the other spouse in the divorce decree or that you made an agreement with your spouse that he or she would pay it. Debt is contractual. If your name is still on the contract for the loan and there is a default, the creditor is coming after you until the debt is paid off by selling the asset or the asset is refinanced into your spouse's name. We help you and your spouse find practical ways to address these problems if, for example, you cannot sell or refinance the house before the divorce is finalized.
- Agreements about who owns property made before marriage (prenuptial agreements) or postnuptial agreements made afterwards (partition and exchange agreements), can legally change property that would normally have been community to separate property or vice-versa. If you have one of these agreements, let your Détente mediator know right away.