A well-known business columnist wrote a column tackling the subject of couples and credit. She addressed the issue of one spouse making the other an authorized user on their credit card and opined that only the person who opened the account is liable for the credit card debt.
She obviously is not from Texas.
The Great State of Texas is a community property state. We have our own take on spouses, liability, and satisfaction of a judgment.
How Does Community Property Work?
Here is how it works. We’ll take an imaginary married couple – Ernest and Mary – and walk through the law.
Ernest opens a credit card in his name. He designates Mary as an authorized signer on the card.
Mary charges $20,000 on the card. Neither Ernest nor Mary have enough money to pay the charge, and they default.
The credit card company sues Ernest, the account holder. It cannot sue Mary because she did not sign the contract with them.
This tracks with the business columnist’s advice. As far as the credit card company is concerned for its lawsuit, only Ernest is liable for the debt.
The credit card company gets a judgment and proceeds with collection. Now the columnist’s advice becomes misleading.
Defining Separate Property vs. Community Property
The credit card company can collect from Ernest’s separate property. That is property owned by Ernest before marriage, is acquired as a gift, or is an inheritance.
It can also be collected from the community property owned by Ernest and Mary. And everything Ernest and Mary own is presumed, by law, to be community property.
That means the credit card company can, in good faith, proceed against all of Mary and Ernest’s non-exempt assets to pay the judgment against Ernest.
Notice I threw in the qualifier “non-exempt.” That is because Texas law makes certain assets exempt from collection. That, however, is a topic for another column.
Collecting from Community Property
Let’s dive a bit more into the weeds regarding community property and collectability. Community property is divided into three categories:
- Community property is subject to Ernest’s sole management, control, and disposition.
- Community property is subject to joint management.
- Community property is subject to Mary’s sole management, control, and disposition.
Sole management community property is the property the person would have owned if he or she was single. That includes:
- Personal earnings.
- Revenue from separate property.
- Recoveries for personal injury.
- And the increases and mutations of, and the revenue from, all property subject to the spouse’s sole management community property.
That is important because one spouse’s sole management community property cannot be reached to pay the other spouse’s debts. So, the credit card company would usually not be able to reach Mary’s sole management community property or her separate property.
However, Mary incurred the debt. That leaves an argument that Mary’s sole management community property and her separate property could be reached by the credit card company.
Importance of Sole Management Community Property
You can see the problem. Few couples keep records to support a claim of sole management community property. Fewer keep separate property separate. And even fewer hire a lawyer to defend them in a collection action and raise these technical defenses.
When a defense to collection is raised, then is up to the judge to determine the order of which property is subject to “execution,” or payment of the judgment. This is the point where the judge considers the facts surrounding the transaction.
Get Community Property Assistance With Hammerle Finley Law Firm
Bottom line: Ernest is the one who will be sued, but both Mary and Ernest will have to pay the resulting judgment.
So, don’t believe everything you read, and schedule a consultation with our team of expert attorneys if you need assistance navigating community property.
Virginia Hammerle is an accredited estate planner and represents clients in estate planning, probate, guardianship, and contested litigation. She may be reached at legaltalktexas@hammerle.com. This blog contains general information only and does not constitute legal advice.
