The economy is affecting more than just unemployment rates and the housing market. Couples who are considering divorce or who are in the process of securing one are discovering that the economy also has played havoc with the value of their assets and the amount of their debts.
This is particularly significant in Texas, a community property state, where the court uses the “just and right” principle to equitably divide the community property between the spouses. And this community property includes not only the valuable property owned by the couple, but also any of the debt incurred during the marriage — including credit card bills, car loans and mortgages.
Given the uncertainty of the current economy, it is important for couples to take action to create some level of certainty in their financial relationships with one another and to take care in protecting their assets.
One of the ways that spouses can achieve this goal is by entering into a prenuptial agreement. A prenuptial agreement, also referred to as a prenup or premarital agreement, is a contract entered into by two partners before they exchange wedding vows. In the prenuptial agreement, the couple can explicitly spell out how their finances will be handled during and after marriage, including which property shall remain separate property and which property, if any, shall become joint property.
Arguably more importantly, couples also can spell out how any debts will be divided between the two of them, including debts owed before the marriage and those incurred during the marriage. This can be particularly useful in cases where one spouse owes a separate debt and fails to pay it, and then the spouse’s creditors come after jointly owned property to satisfy the debt. A carefully drafted prenuptial agreement can offer a measure of protection against these types of claims.
However, a prenuptial agreement may not be able to protect a spouse from claims by creditors for unpaid joint debt, even if the prenuptial agreement stipulates that only one of the spouses is responsible for repaying it. In these cases, the creditors have the legal right to seek payment from both parties on the account, regardless of what the prenup states. Creditors are not a party to a premarital agreement and it cannot be enforced against them.
For some couples, the idea of entering into a prenuptial agreement is unsavory, and they choose to forgo it. If the husband and wife later decide that perhaps this was not a good decision, they can enter into a post-nuptial agreement. A post-nuptial agreement, as the name implies, is a contract signed by spouses after they have been married. Just like a premarital agreement, in a post-nuptial agreement the spouses can dictate which property is owned separately, which property is owned jointly, and how existing and future debts will be divided between them.
Post-nuptial agreements may be a good tool for couples who want a divorce but have decided to wait until the economy recovers. This way, the spouses can agree on some of the issues regarding separate and community property as well as decide how their finances will be handled during the waiting period before the divorce. For example, will the spouses still have access to joint credit accounts and bank accounts? How will any debt incurred during the period before the divorce be handled?
Additionally, couples not contemplating divorce may want to create post-nuptial agreements just for the security of knowing how their property would be divided should they ever get divorced or in the event of one of the spouse’s deaths.
For couples who did not have prenuptial or post-nuptial agreements prior to seeking divorce, the process can quickly become more adversarial and complex as the parties try to figure out who owns which property — especially when it comes time to divide up the debt owed between the two.
For many couples, the family home is the most valuable community property subject to division. Normally, if the couple cannot agree on the disposition of the home, the court can order the house to be sold and then divide up the proceeds from the sale in an equitable manner.
Now, however, many couples are upside down in their mortgages, facing foreclosure or simply discovering that their homes are worth far less than they thought. Dreams of taking the money from the sale of the home to finance new, separate lives are quickly crushed as the spouses must figure out how to handle the negative equity in their home.
For other couples who entered into valid prenuptial and post-nuptial agreements, they may find out that those agreements will not protect them from all of their creditors. For example, even though soon-to-be ex-spouses agreed that the husband would pay the remaining balance on a joint credit card, the credit card company is not legally obligated to honor this agreement. In fact, the credit card company has the right to seek repayment of the debt from anyone listed on the joint account.
A carefully crafted property settlement could help protect against this type of outcome. But in many cases, it still would require one spouse to pay off the joint debt and then seek indemnity (repayment) from the other spouse.
Even the most well-written premarital and post-marital agreements may not solve all of a couple’s problems when it comes to property and debt division. Couples who have taken the time to come to an agreement concerning these important financial issues before a divorce or separation is ever considered, however, may find that their divorce process is much less expensive, time-consuming and stressful than it is for other couples. If nothing else, these types of agreements can give spouses peace of mind in an economy that has been offering little of this as of late.
For more information on premarital or post-nuptial agreements or divorce issues, speak with an experienced family law attorney.