divorce and debt: facts to know

before, during and after divorce

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As common sense and statistics tell us, the leading cause of marital discord is money.  Therefore, it is not surprising that many times divorce inventories have more red numbers than black ones. 

Media sources often portray Hollywood stars of “power couples” divorcing.  Included with the typical hype may be which party will get the mansion, vacation home, or car collection, but rarely is there any coverage about how the parties will divide debt. 

The hard truth is that debt, just like assets, are included in the community estate.  No matter what your own moral compass may register regarding your and your spouse’s debt, Texas case law establishes rules that might surprise you.  First, debt incurred during the marriage is presumed to be community debt.  See Cockerham v. Cockerham, 527 S.W.2d 162, 171 (Tex. 1975).  There must be a sufficient amount of evidence to rebut this presumption. 

Despite well established case law, Texas divorce decrees contain sections entitled “Debt to Husband” and “Debt to Wife”, which seemingly assign responsibility for each debt.  These sections of the decree will identify each creditor, the account number, and account balance.  At the close of the divorce proceedings, the divorced couple has a lengthy document called a final decree of divorce.  The husband, wife, their attorneys, and the judge sign the final decree.  Often times the parties order a certified copy of their divorce decree, throw it in a drawer or the safe deposit box, and rarely look at it again unless there are children and custody issues involved.

It may be months or years later when the phone rings and one of the parties is greeted by the monotone utterances of a bill collector reading a script off the computer screen.  The dialogue may go something like this:

Bob the Bill Collector:  “This is Bob with XYZ Visa.  I’m calling because your account is 60 days past due, and I need to know when you plan to remit the past due amount and begin making payments.”

You:  “What are you talking about?  That’s my ex’s account.  Our divorce decree says so.  I haven’t been married to him/her in over (whatever time frame)!  Call that deadbeat for the money.”

Bob:  “Well, Mr. or Ms. So and So, that doesn’t mean you don’t owe the debt if your ex defaults.”

You:  “I have a certified court order signed by me, my ex, our attorneys, and the judge saying that I don’t owe you anything for that account.  That account is the ex’s problem.  When you find him/her, let me know because he/she owes me money, too!”

Bob:  “Your divorce decree might say you aren’t responsible, but the law says you are.  Why don’t you give me a check by phone and we can get you on a payment plan.”

You:  “Are you dense?!  Did you hear anything I just said?!  I’m not responsible and I’m not paying you one red cent on any of that debt.  Call the ex but stop hounding me!”

Bob:  “Mr. or Ms. So and So, I did hear you, and you’re wrong.  No matter what your divorce decree says, you owe XYZ Visa.  If you don’t begin making payments, XYZ Visa will report this delinquent account to the credit reporting agencies, and take action up to and including litigation.”

I’ll let you fill in the closing dialogue for yourself.  You are angry and hang up the phone.  You may think that Bob, located at some call center hundreds of miles away, has no idea what he’s talking about. 

As unsettling as it may be, Bob is right.  Unless the XYZ Visa was a party to your divorce suit and agreed to the terms of the final decree, you owe the money.  It is highly unusual for a husband and wife or their attorneys to implead creditors into divorce actions due to complex legal issues such as jurisdiction and venue on both the state and federal level. 

To understand how you could possibly be responsible for debt assigned to your ex, you must rewind to the point in time when the credit account was opened.  You will need to look at the original account agreement.  Almost no one keeps those documents, so order a copy of your credit report from one of the big three credit reporting agencies (EquiFax, Experian, or TransUnion).  If the account shows up on your report, then you were more than likely a party to the credit agreement.  Despite how the divorce decree allocates the debts (both secured and unsecured), the Court has no authority to modify the contractual obligations between the spouses and the creditor. 

To say it another way, the court cannot take away the creditor’s right to proceed against either spouse(s) for payment of a community debt that was incurred prior to the decree.  See Blake v. Amoco Fed. Credit Union, 900 S.W.2d 108 (Tex. App. – Houston [14^th Dist.] 1995, no writ). 

Let’s presume the account was originally opened in both your names and the creditor was looking to both you and your spouse’s income and assets to repay the obligation.  This means that you are both responsible for the debt.  But what about the divorce decree that spells out which assets and liabilities you and your ex were assigned?  Is it a worthless piece of paper?  No.

You will not be able to file a motion to enforce the divorce decree to get the defaulting spouse to pay the debt.  An enforcement action will only assist if there was specific property, such as a vehicle, brokerage account, or personal property, the other spouse failed to turn over.  But what about the debt?  All is not lost.  You could file an action for breach of contract against the defaulting spouse.   The divorce decree is a binding contract that both parties voluntarily signed before the court.

If your ex has defaulted on one or multiple obligations, a suit for breach of contract may be cold comfort.  As the old saying goes, you can’t squeeze blood from a turnip.  Nevertheless, if you pursue this option, your damages may include any money you agreed to pay the creditor to keep the account out of collections, interest, and other miscellaneous expenses, such as attorney’s fees if any are incurred.    

Depending on the size of the debt that the defaulting party hasn’t paid, you could seek relief in small claims court.  Texas small claims courts have jurisdiction from $0.01 up to $5,000.00.  These courts are designed for individuals who want to represent themselves and avoid hiring an attorney.  This is where people go to argue the “do right” law.  However, if the amount in controversy is greater than $5,000.00, then you must file suit in a county court, county court at law, or a district court with jurisdiction over the matter.  At this point, you may consider hiring an attorney to prosecute the claim if there’s a reasonable possibility you could collect from the defaulting spouse.  If possible, never let things get to this point by utilizing some of the suggestions outlined below. 

Before you go to court or sign the final decree of divorce, you should research each and every account that the decree references no matter if that account falls under the “Husband” or “Wife” section.  You both need to be aware how the accounts were established, and who and what the creditor deems liable.  It may be in your best interests to refinance jointly held debt and establish the debt in each individual’s name if that is possible.  If you or your spouse’s credit score is not strong enough to take this route, then you may consider liquidating assets to repay the debt before the divorce is final and close the account.  It will be cold comfort to pay off a debt only to find out that your ex ran up a bunch of charges.  A method may be to sell a car, a house, real property, or take a 401-K loan prior to finalizing the divorce to pay off debt.  Because a mortgage and car loan can have long terms of payments, it may behoove you to sell those assets and let the other party acquire them on his or her own credit.  By paying off those assets, those will no longer appear as debts on your credit report or create potential future problems if the other party fails to make payments to the creditor.

After your divorce is final, you may consider taking these actions:

1. Closing all joint accounts with a low balance or zero balance.    
2. Request a credit report from one of the big three credit reporting agencies 90 days after the divorce is final.  Look for any errors or discrepancies and aggressively challenge them in writing. 
3. Ask each creditor to send you a duplicate notice for the joint accounts – even if the ex was assigned this account.  Monitor to ensure that payments are being made on a regular, timely basis.
4. Make an offer for accord and satisfaction – basically, offer the creditor an amount of money in exchange for a release of your liability on the account assigned to your ex.
5. Communicate with the big three credit reporting agencies to notify them of the divorce and any name changes.
6. Create a debt reduction plan.  There are many excellent resources available, such as Consumer Credit Counseling Services, Dave Ramsey, or a church based debt reduction plan. 

Bottom line – your credit score is an asset just like your home or car.  In fact, if you don’t have a good credit score, your ability to obtain consumer or business financing may be extremely limited.  

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