If you thinking about divorce, you may be worried about property division and also the dividing of financial and other assets you have worked hard to acquire. What happens with joint debts and other entangled financial decisions you made with your soon-to-be ex-spouse? How do these issues get resolved?
Hannah Rector is an associate with Hargrave Family Law. Her expertise on these matters allows us to pull back the curtain and reveal the information that empowers people to avoid costly mistakes in a divorce in Texas.
- What is the general framework for dividing property in a Texas divorce?
- How does Texas view a 401K account established before marriage?
- What’s the biggest challenge in proving separate property from recordkeeping?
- If a house was purchased two months before marriage and it has an outstanding mortgage, who owns it?
- If parties refinance during marriage, and the spouse who doesn’t own the property is added to the deed of trust, does that give them an ownership interest in the house?
- What happens with community property in a divorce?
- What will the court consider doing in a disproportionate division?
- What other factors do courts consider besides just the disparity of earning?
- Is there such a thing as community debt in Texas?
- What if a car was bought during the marriage, both parties signed the car note, but only one of them keeps the car after the divorce?
- What if a couple’s debt has been put on one partner’s credit because they had a better score and now that individual is carrying all the debt from the marriage?
- Many celebrity divorces end in big alimony payments that go on for years. Does that happen in a Texas divorce?
- How is spousal maintenance different from alimony, and what are some of the limitations on that?
- How does all the personal property get divided?
- What about when people have artwork or a wine collection or other valuable collector’s items?
- What are the five tips to help people avoid costly mistakes in a divorce?
What is the general framework for property division in a Texas divorce?
01:03
Hannah
Texas is a community property state. That means that everything that’s earned or acquired during the marriage is community property that will be divided upon divorce. No matter whose name is on the paycheck, no matter whose name is on the bank account or the car title, if it was acquired during the marriage, it’s presumed community property.
Jennifer
Yet, people often come into the divorce process thinking: “That’s my money because I earned it.”
Hannah
It’s presumed to be community property. There are exceptions known as separate property which is comprised of things that you actually owned full and outright before the marriage started. This would also include things that you received during the marriage as a gift or inheritance.
Jennifer
One of the first things we do is help people identify all the property they have, and they often tell us, “I don’t have any separate property.” To which we usually reply, “The wedding ring.”
Hannah
That’s right. It was a gift, and most people owned their engagement rings prior to marriage. In that case, the wedding ring qualifies as two forms of separate property. That means that the court cannot award it or divide it to the other party. It will be confirmed as your separate property if you can show that you did own it prior to marriage or that you received it as a gift.
Jennifer
Something confusing about the separate property is determining that you owned it before the marriage. Maybe it’s a retirement account that you contributed to before marriage, and it just has sat there during the marriage. You didn’t put any more money into it, so it should be separate property, right?
How does Texas view a 401K account that someone began before getting married?
02:40
Hannah
Interest in dividends that come from your 401k before you were married is completely separate. But after getting married, those increases are community property. So, what we need to do is look at what the value of that 401k was at the date of marriage, and that will be set apart as your separate property and confirmed as yours. Everything else that’s in the account is going to be community property, subject to division.
Jennifer
So, when an asset has appreciated, and the interest becomes cash dividends that are reinvested in the account, then this results in the account being co-mingled. That can be complicated to unwind.
Hannah
Yes. If you’re trying to account for separate property, often what we need to do is trace the account and all the funds that moved in and out of the accounts. We can see each dollar and determine whether it’s separate or community.
Jennifer
And if we’re going to court, it’s not just enough to say, “Oh, that’s my separate property. The court can’t touch it.” We have a higher burden in proving it.
Hannah
Right. You have to show more than the typical preponderance of the evidence. You have to prove that it really is your separate property in a clear and convincing manner to the court.
Jennifer
And that usually involves forensic CPAs and so forth.
What’s the biggest challenge with proving separate property from recordkeeping?
04:26
Hannah
Often, in a decades-long marriage, there is no way to show what was separate property versus community and how it was accumulated throughout the marriage. So, keeping accurate records, receiving statements, preserving statements, and showing those to your attorney when you’re getting divorced is one of the ways that help you prove your separate property in the divorce.
Jennifer
We typically find that banks keep records for about seven years—sometimes a little longer than that, but not always. So, it is incumbent upon the person who wants to be able to prove separate property to make sure they have every single statement going back to the date of marriage.
If a house was purchased two months before marriage, and there’s a mortgage on the house, who owns the house?
05:31
Hannah
The house will be owned as separate property by the party who owned it prior to marriage. However, that property is likely paid down with community funds that are earned during the marriage which creates a reimbursement claim on behalf of the community property. We can’t change the character of the house itself. It will always be separate, but the community may be owed that amount back that was used to pay down the debt.
Jennifer
And even though the community’s been paying down the debt over the years, the community’s not going to get to share in the appreciation of that asset?
Hannah
Correct. The only reimbursement is the reduction in principle on the mortgage, which is often, especially in Texas, not the actual accumulation of the value that the home has gotten through the marriage.
If parties refinance during the marriage, and the spouse who doesn’t own the property is added to the deed of trust, does that give them an ownership interest in the house?
06:43
Hannah
It depends on the facts around the case. If the parties have some sort of document that clarifies that they are trying to convert it to community property or that the owning spouse is gifting the other spouse a half share in the house, then it may convert it to a shared asset. Otherwise, no, the refinance itself does not change the character.
Jennifer
You’re just adding an obligation on the loan to someone who doesn’t have an ownership interest in the underlying assets which can be a big mistake. These kinds of mistakes can be avoided if at the outset, before you enter marriage, you have a premarital agreement.
Hannah
Yes. At the outset you can establish how you’ll deal with accumulated assets. Sometimes you want to have a community estate during the marriage, but you don’t want those incomes and increases in separate property to be considered community as they normally would be. That’s an easy fix with a premarital agreement.
Jennifer
So, to be clear, if you owned something before marriage, then in a divorce the court can’t touch it. It’s yours so long as you can meet that higher burden. You have all your documents in place, and you can prove it’s your separate property.
What happens with community property in a divorce?
08:01
Hannah
The court divides community property in what’s called a “just and right division,” which is not exactly 50/50, but we’re not talking about 80/20 splits, either. We’re talking about maybe 52/48 in a disproportionate division.
What are some of the things that the court will consider in a disproportionate division?
08:23
Hannah
The biggest one is disparity of earning power of the spouses. Oftentimes, one spouse is the only breadwinner, or one spouse earns significantly more than the other. The lower earning spouse is likely going to get a larger share of the community estate to make up for that. The thought is that the higher earning spouse will be able to make up for it in short term.
What other factors do courts consider besides disparity of earnings?
08:56
Hannah
Income fault in the breakup of the marriage benefits the innocent spouse. That said, other factors to consider might be:
- What would the innocent spouse have derived from continuing the marriage?
- Who has custody of the children?
- How much separate property are we dealing with? If one spouse has a large estate of separate property that they owned prior to marriage, even if they’re not the higher earning spouse, they may not get a larger portion of the community estate.
Jennifer
I think one of the things we also when dividing marital assets is that people are really surprised—if they’ve sort of checked out on the financials—that they don’t have as much property to divide because, really, it’s been spent.
Hannah
It’s important to stay clued in throughout the marriage. Whether you’re considering divorce or not, talk to your spouse about your finances. Get copies of your statements; look them over. Look at your spouse’s pay stubs if they share that with you. Know how much each of you are contributing to your retirement accounts. Know what’s in the retirement accounts and whether you have any loans on them. Things like that are important to know, and a lot of people don’t have that information at the beginning of the divorce process.
Jennifer
It’s fairly common for couples to maintain separate accounts, and a lot of times a person thinks, “Well, that bank account is in my name. I don’t have to be accountable to the other person for what’s in it.” How do you respond to that?
Hannah
That’s not the case. If it’s owned or acquired during the marriage, it’s presumed to be community property. The other spouse has a right to see those statements.
Jennifer
Spouses have fiduciary obligations. There’s a high duty of loyalty and honesty in dealing with the spouse. Even if you have separate accounts, for whatever reason, you still owe each other some responsibility with regard to how you use the money in those accounts.
Hannah
Right. You’re basically a steward of your community property on behalf of the other spouse.
Jennifer
And just because the boat or the car is in your name doesn’t mean that the other spouse doesn’t have an interest in it. That’s where we look at inception of title.
Hannah
Correct. When did you acquire it? How did you acquire it? Those are the big questions for determining the character of an asset. And even if it’s separate property, the other spouse has a right to know what’s going on and what the value of the asset is.
Is there such a thing as community debt?
12:00
Hannah
The quick answer is no. A debt is a contract between the lender and the borrower. The court cannot alter that original contract. If we have a mortgage in one party’s name, even if the house is awarded to the other party, the court can’t go in and change that contract between the mortgage company and the original borrower. So, we have to account for that and how we’re going to award these debts. You don’t want to be responsible for a debt that the other party is ordered to pay which can end up hurting your credit if the other party defaults.
Jennifer
And we definitely see that. It can be a dangerous situation to be in when you negotiated a deal where the other side said, “Hey, I’ll pay off your visa as part of the division.” So, you give them additional assets to cover that $20,000 debt, and then they quit paying your Visa bill.
Hannah
That’s right. You’re still responsible for paying that Visa bill because it’s your name on the card.
Jennifer
You may have a “cause of action against your spouse,” in this scenario, but that’s going to involve hiring lawyers and having to go back to court. Trying to collect on that could be really difficult.
Hannah
And expensive and time consuming.
Jennifer
Now, there’s the idea that the community property is subject to liability for debts incurred during the marriage. I think that’s where things kind of get confusing because while the lender has the contract with the person who signed the debt, the fact is, if there were ever to be a bankruptcy or if either of you were to default, the creditor may come after community property.
Hannah
Yes. Community property, no matter whose name it’s in, is likely able to satisfy a debt that was incurred during the marriage.
Jennifer
So, it’s important to know what kind of debts your spouse is acquiring and encouraging because that could end up impacting your property rights down the road.
What if a couple bought a car during marriage, and both signed on the car note, but only one of them keeps the car after the marriage?
14:13
Hannah
If your name is on the note, pay it off or make sure the other party gives you access to the records to make sure the other party is paying the note.
Jennifer
You need to take steps to protect your own credit rating because it can be really difficult post-divorce.
Hannah
If the other party is ordered to pay a debt that’s in my client’s name, we need to refinance the debt or sell the asset itself. That protects my client from a creditor coming after them for lack of payment by the other spouse…which happens.
What if a couple’s debt has been put on one partner’s credit because they had a better score and now that individual is carrying all the debt from the marriage?
15:06
Hannah
Usually that spouse will receive a larger share of what we call the “black assets” to offset the amount of liability that he or she is incurring.
Jennifer
We have a tool that we use in our office—a spreadsheet—because we’re always looking at the bottom line. So, if you’re taking more of the debt, it may mean then you’re also taking more of the assets that have value to equalize that division.
Celebrity divorces make the news, with big alimony payments and divorce cases that go on and on and on for years. Does that happen in a Texas divorce?
15:51
Hannah
Most of those celebrity divorces are in California or New York. Texas doesn’t have alimony. You’ll have to support yourself after the divorce.
How is spousal maintenance different than alimony, and what are some of the limitations on that?
16:11
Hannah
It’s a very limited eligibility. It was passed as part of a welfare reform bill in the nineties, usually to keep divorced women off state services. That kind of tells you how extreme the case has to be to merit post-divorce spousal maintenance. It’s kept in duration and amount, and it’s typically tied to the length of the marriage. You have to have been married at least 10 years to even be eligible to ask for spousal maintenance.
Jennifer
And you have to show that you are not able to provide for your own reasonable living expenses.
Hannah
It’s “minimum” reasonable. So, it’s not about maintaining the lifestyle that you had during the marriage. We’re talking roof over your head, food on your table, gas in your car…those kinds of things. If you are at all able to hold a job where you can make your own rent payments and car payments, the court really won’t think that you need the post-divorce maintenance.
Jennifer
And that’s a big wake up call for a lot of people, especially when we have a lot of Californians moving to Texas. In our legal system, we have community property division; they’re sharing the marital assets.
Hannah
Right. Even if you have a large marital estate, and you know about all the money you’re going to get from this marriage—maybe by a cash payment, maybe you’re getting a portion of a retirement account. But you’re not entitled to ongoing payments for the rest of your life.
Jennifer
Someone out there has that neighbor who got alimony of $10,000 per month for 10 years. There are cases where parties agree to alimony, and a few years ago, there were decent tax incentives for alimony, but those tax incentives have gone away.
Hannah
Right. As of 2018 or 2019 the IRS no longer recognizes alimony as a tax-deductible item, but the parties can agree and have what we call “contractual alimony.” That can be a way to avoid a lengthy court battle for a larger share of the community estate. Sometimes the higher earning spouse says, “You know, I’ll take care of you for a while; I’ll give you this much for this many months, and we’ll call it a day.”
Jennifer
Yes, there certainly are times when the higher earning spouse wants to make sure that their ex is going to be taken care of, and there’s ways to make provisions for that. But, if they’re not willing to do that, then you’re probably not going to have as much as you hoped to get from the court.
Hannah
Right. Courts are pretty slow to award the post-divorce maintenance at all.
How does personal property get divided in a divorce?
18:55
Hannah
When we talk about personal property, we mean the things that are inside your house: clothes, jewelry, furniture, electronics, things like that. Those are divided when the parties separate; although, Texas does not have legal separation. We use that term loosely when the parties are no longer living under the same roof
Jennifer
They can go through and take turns and pick, and for the most part, lawyers really aren’t involved in that process unless we need to be because it can be really expensive to be involved in the division of pots and pans.
Hannah
And refrigerator, refrigerator magnets, and cookie cutters, things like that. It’s going to be a lot more affordable to replace those items than to pay both attorneys to argue over them. We value them at fair market value, so we ask: “What could you get for this at a garage sale?” rather than determine what it would cost to replace the item. We don’t want to have to bring in someone to appraise pots and pans.
What about when people have artwork or a wine collection or other valuable collector’s items?
21:30
Hannah
Assets and ongoing collections can be valuable.
Jennifer
In that case, it can certainly be helpful to bring in an appraiser who is experienced in that area. But we’re always looking into whether it makes financial sense.
Hannah
Right. What’s the amount you want to pay for the controversy? Are you going to spend more on this appraisal than the actual asset itself is worth? Often the answer is, “Yes.”
Jennifer
We’ve gone through the overall framework. Texas is a community property state, so everything’s presumed to be community property. The exception is whether you could show separate property.
What are the five tips to help people avoid costly mistakes in a divorce?
22:16
Hannah
- Keep yourself informed throughout the marriage.
If your name is on a bank account, you’re entitled to see those statements. Sign up for paper statements or get an online login. If you can’t figure out how to do it, go down to the branch, and they’ll walk you through it. Know what your income is each month, what you’re spending each month, and have a good idea of what’s incoming and outgoing from the community estate.
- Disclose your information to your attorney during the suit.
A lot of people think, “Well, that’s a small account, or it’s only crypto, or it’s in my name, so I don’t need to disclose it.” You absolutely must. You’re a fiduciary to your spouse, but also there’s ethical and legal obligations in the divorce process. It will be much more costly in the end if we have to go back and re-divide assets after the divorce is over, and that will happen if we learn that an asset was undisclosed.
If a spouse feels cheated financially, conflict and the contentiousness of the divorce ramps up. Suddenly we’re focused on what we’re missing from this statement or that statement, or what the other party spent on this or that. We’re not looking at the big picture and focused on our goal of ending the marriage. Which segues nicely into #3…
- Keep your eye on those big picture goals.
Don’t get lost in the weeds. Don’t get caught up on the principle of the matter because it’s so costly, and it happens a lot. It’s difficult to keep your eye on that big picture—the finish line of the divorce. You’ll keep your sanity if you let those little things go.
- Keep all of your statements.
Remember, banks only have to keep your statements for seven years. So, it’s your responsibility to keep accurate and updated records. That will also make it a lot easier when the time comes to share those documents with your attorney. Just hand over a flash drive that contains all of your Chase Bank statements.
- Time is your most valuable asset.
Finally, and I can’t stress this enough, time, time, time. You can make up for your financial losses after the divorce, and you’re never going to get these months that you’re spending on the process back. So, focus on the big picture and get through the suit as quickly and efficiently as you can.
Jennifer
Exactly. Hopefully it will only be months instead of years. It usually is, but we do see cases where it does drag on for years. It takes a toll.
Hannah
And I would say it’s usually avoidable.
Jennifer
Exactly. Thank you so much for taking time to sit down and sharing your advice on how to avoid costly mistakes in a divorce in Texas.
