Community Property and Credit in Texas Divorces

If either you or your spouse makes a purchase on credit during your marriage in Texas, there is a presumption that the credit utilized is a community in nature. This would make sense as all property that exists between you and your spouse at the time of your divorce is considered to be community as well. However, there are ways that you and your spouse can overcome that community debt presumption.

For example, you could provide paperwork that shows that a particular creditor agreed only to look only at your credit history when extending credit for a loan or credit card. This can be made more accessible if there is a marital agreement in place where you and your spouse formalize this arrangement, but even if you haven’t gone to these lengths, it is possible to prove this in court if necessary. There must be a clear demonstration that the creditor has chosen not to look at your spouse’s credit to do so. Plan and speak to the creditor about this possibility when the loan is taken out.

Sharing Bank Accounts

Most spouses share bank accounts, from my experience, at least. My wife and I do. There are benefits to doing so, including sharing the financial knowledge of your family and sharing accountability when it comes to spending. These concepts will almost surely benefit you in your marriage as financial problems lead to excessive divorces in our county. However, if you are going through a divorce, you and your spouse have shared bank accounts can be a problem.

The most obvious problem is that a shared bank account could potentially contain money that is both community property and separate property. If this property is commingled, the presumption exists that community funds are taken out of the account before the separate property funds. If you get to the point where the community property funds are withdrawn completely, it would be the separate property funds taken out.

Deposits to the account would replenish the community property income until it is restored to its prior amounts. To further illustrate this point, let’s consider the following example. Suppose that you have inherited $50,000 and opened up a savings account with that money in mind. Your husband’s salary is also deposited into this account until the balance reaches $70,000.

A family emergency comes up, and the balance is withdrawn until only $15,000. Years later, you and your husband decide to get a divorce and the balance at that time is $40,000. Even though the account has been replenished nearly to its initial balance of $50,000, your separate property interest would only be $15,000, which represents the lowest intermediate balance.

How is income from separate property treated in a divorce?

Income that is derived from separate property is considered to be community property under Texas family law. There are a couple of exceptions to this rule that we should go through. First off, you and your spouse can agree in writing- before or during the marriage- that the income from a specific separate property interest will remain separate property. The other exception to the rule is that if there is a gift from you to your spouse, then the income from that property is your spouse’s separate property and not part of the community estate.

The general rule that income earned from separate property is community property leads us to a discussion about interest and dividends earned on separate property investments. The earnings on these investments are likewise considered to be community property. As it happens, investment accounts can be invested into with commingled funds over the years. Therefore it can be difficult for you or your spouse to prove that the investment is either of your separate property.

A piece of advice that could help you show a court in a potential divorce that your investment account is a separate property would be to work with your spouse on agreeing to a premarital property agreement. A premarital property agreement would allow the dividends from that investment to remain separate property rather than community property. If you or your spouse have large investment portfolios, then this is a solid idea, in my opinion.

Likewise, suppose you are a business owner and are about to get married. In that case, you may want to consider a premarital property agreement that provides that your business is to be considered your separate property upon a future divorce. This benefits you if the business grows in value, and it helps your spouse if you were to accumulate debt on the business. Either way, it removes one potential source of conflict during the marriage and allows you both to focus on other issues.

What is a premarital property agreement? Let’s discuss this issue in greater detail.

Premarital property agreements

We’ve already covered the fact that there is a presumption that property that you and your spouse have in place at the time of your divorce is considered to be community property if you are fortunate enough to be a person with significant assets before your marriage. You may have been advised to think strongly about a premarital property agreement.

A premarital property agreement can clarify the nature of different assets and create a structure to your property that can override the community property presumption. An agreement must be written and cannot be an oral agreement or mere “understanding” between you and your spouse. For instance, an agreement can set forth that the income from the separate property will remain separate property instead of becoming community property.

The premarital agreement can also set forth the conditions for property disposition upon you and your future spouse divorcing. One thing that the premarital property agreement cannot do is to limit either you or your spouse’s obligation to pay child support in the future. If you and your fiancé plan on negotiating a premarital agreement, it is advisable for each of you to hire an attorney to advise you both on your rights under Texas family law.

Partitioning community property

A second frequently entered an agreement for spouses regarding their community property is a partition or exchange of community property. A partition works like this: one piece of community property can be partitioned by a written agreement so that you and your spouse own a portion of that property as your separate property.

However, the partition agreed to does not have to be in equal shares. What’s more, you and your spouse can exchange community property interests in different assets in order so that you can make one of the assets the separate property of one of you into the separate property of the other spouse. It is recommended that if real estate is governed by one of these agreements, you record any change in ownership by signing and filing a new deed to memorialize the change in ownership.

More on community property agreements in tomorrow’s blog post

We will continue discussing community property agreements and other subjects related to community property in tomorrow’s blog post from the attorneys with the Law Office of Bryan Fagan, PLLC.

In the meantime, if you have questions regarding anything that you have read today, please consider contacting our office to schedule a free-of-charge consultation. Our licensed family law attorneys can sit down with you in our office to answer your questions and discuss the solutions that our office can work with you on as a client of ours. We represent families across southeast Texas and would be honored to do so for your family as well.

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Community Property and Credit in Texas Divorces

Sharing Bank Accounts