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dividing debts

One of the most contentious and often difficult parts of the divorce process is the division of the spouses’ marital debts. The spouses may be able to agree on how the debts will be divided—but often they cannot, and the court must determine how the debts will be divided—and sometimes the court will order certain assets be sold to facilitate the payment of the debts.

If the spouses live in a community property state (as opposed to an equitable distribution state), and if a debt was acquired by one spouse before the marriage, it will generally remain that spouse’s separate debt and obligation. But if the debt was acquired during the marriage it is a community debt and both spouses are responsible for it—at least in the eyes of the divorce court. Community property states generally include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In other states—so-called equitable distribution or common law property states—the court attempts to divide the spouses’ debts equitably (fairly) and may order one spouse to use separate property to pay the debts, or may order marital property sold to pay the debts, and award one spouse more of the remaining marital property.

In practice, the difference between the division of debts in community property states and in equitable distribution states is sometimes not as great as it may seem, as the court in a community property state may have the discretion to divide the spouses’ community property and community debts on a 60-40, 70-30, or other unequal basis.

When evaluating the division of debts, it is also important to consider any tax implications for the division of the debts—such as the mortgage interest deduction on the spouses’ home—and the impact on a spouse’s credit when the other spouse is given a debt obligation in the divorce, but fails to pay the debt. Unless the creditor in such a situation has agreed to look only to the spouse given the debt, the creditor may pursue the other spouse for payment of a defaulted debt.

In Texas, which is a community property state, the division of marital debts during a divorce follows the principle that debts incurred during the marriage are considered community debts and both spouses are typically held responsible for them. Debts acquired before the marriage usually remain the separate obligation of the spouse who incurred them. However, Texas courts have the discretion to divide community property and debts in a manner that may not always be equal, such as on a 60-40 or 70-30 basis, depending on the circumstances of the case. It is important to note that the division of debts can have tax implications, such as affecting mortgage interest deductions, and can impact credit scores. If one spouse is assigned a debt and fails to pay, the creditor may still pursue the other spouse for payment unless the creditor has agreed to release the other spouse from liability. Therefore, it is crucial for individuals going through a divorce to understand how debts will be divided and to consider the potential financial consequences.

Texas Statutes & Rules

Texas Family Code, Section 3.002 - Community Property
This statute defines what constitutes community property in Texas, which is relevant to how debts are divided upon divorce.

In Texas, community property includes the property, other than separate property, acquired by either spouse during marriage. This means that any debts incurred during the marriage are presumed to be the responsibility of both spouses and are subject to division upon divorce.

Texas Family Code, Section 3.001 - Separate Property
This statute defines separate property, which is important for understanding which debts remain the responsibility of one spouse.

Separate property in Texas includes anything one spouse owned before marriage, property acquired during the marriage by gift, devise, or descent, and the recovery for personal injuries sustained by the spouse during marriage, except for any recovery for loss of earning capacity during marriage. Debts incurred before marriage would typically be considered separate obligations of the spouse who incurred them.

Texas Family Code, Section 7.001 - General Rule of Property Division
This statute outlines the general rule for division of property and debts in a Texas divorce.

Upon divorce, the court shall order a division of the estate of the parties in a manner that the court deems just and right, having due regard for the rights of each party and any children of the marriage. This includes the division of both assets and debts.

Texas Family Code, Section 7.002 - Division and Disposition of Property
This statute provides the court with the authority to divide community property and to determine liability for debts.

The court may order a division of the estate of the parties in any way that the court deems just and right, including ordering the sale of certain assets to facilitate the payment of debts. The court may also set aside a portion of the community estate to be managed by one spouse as a sole managing conservatorship.

Texas Family Code, Section 7.006 - Agreement Incident to Divorce or Annulment
This statute allows spouses to enter into an agreement concerning the division of their estate, which includes debts.

The spouses may enter into a written agreement concerning the division of their estate, which the court shall approve unless the court finds the agreement to be unconscionable. If the agreement is approved, it is binding on the court, and the court shall render an order in accordance with the agreement.

Texas Family Code, Section 3.308 - Liability for Debts
This statute clarifies the liability of spouses for certain debts in Texas.

Each spouse is personally liable for their own acts and for any debts incurred as an agent for the other spouse. This means that if one spouse incurs a debt during the marriage without the other's consent or for non-necessities, they may be held individually responsible for that debt.

Federal Statutes & Rules

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) - 11 U.S.C. § 101 et seq.
This federal statute is relevant because it addresses the treatment of debts in bankruptcy, which can be a factor in divorce proceedings, especially when one or both spouses are considering bankruptcy as a means to manage marital debts.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) reformed the bankruptcy code and affects how debts are handled in bankruptcy. This can be particularly relevant in divorce cases where one or both spouses are insolvent or considering filing for bankruptcy. The act includes provisions for a means test to determine eligibility for Chapter 7 bankruptcy, mandatory credit counseling, and financial management education. It also addresses the dischargeability of certain debts, the automatic stay, and the treatment of assets and liabilities in bankruptcy proceedings. In the context of divorce, if a spouse files for bankruptcy, it may impact the division of debts and assets, as well as the responsibility for joint debts. It's important to note that obligations such as alimony and child support are generally not dischargeable in bankruptcy.

Internal Revenue Code (IRC) - 26 U.S.C. § 1 et seq.
The Internal Revenue Code is relevant to the division of debts in a divorce because it governs the tax implications of transferring property and assigning debt obligations between spouses.

The Internal Revenue Code (IRC) provides the framework for federal tax laws in the United States, including those that apply to the transfer of property and debt obligations during a divorce. For example, transfers of property between spouses as part of a divorce settlement are generally not taxable events. However, if one spouse takes on debt that was previously held jointly, there may be tax implications, such as the loss of mortgage interest deductions if they no longer own the property. Additionally, the assignment of debt in a divorce does not necessarily change the liability to the creditor; both spouses may remain liable for joint debts unless the creditor agrees to release one spouse from the obligation. The IRC also addresses issues such as alimony and child support, which can have tax consequences for both parties.

Fair Credit Reporting Act (FCRA) - 15 U.S.C. § 1681 et seq.
The Fair Credit Reporting Act is relevant to the division of debts in a divorce because it governs the collection, dissemination, and use of consumer credit information, which can be affected by divorce settlements and debt division.

The Fair Credit Reporting Act (FCRA) is designed to ensure the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. It regulates the collection and use of credit information and provides consumers with certain rights regarding their credit reports. In the context of divorce, if one spouse is responsible for a debt after the divorce and fails to pay, it can negatively affect the credit report of the other spouse if the debt was originally joint. Under the FCRA, individuals have the right to dispute inaccurate information on their credit reports, which can be crucial if a divorce decree assigns debt responsibility to one spouse but the creditor continues to report the debt as a joint obligation.