A common issue in most divorce cases is what to do with the marital residence. If the parties rent their residence this is not a big issue, but in most divorce cases there will be owned real estate that must be dealt with.
Two Most Common Ways to Handle
While every case is different and there are many unique and unusual sets of circumstances, for most cases there are only two realistic divorce outcomes when it comes to the house. Either the house gets sold and the proceeds from the sale split (usually on some percentage basis) or either the husband or the wife is awarded the house along with the debt attached to the house.
What About the Equity?
When one spouse is awarded a house that has significant equity the other spouse will want an offset from some other asset. As a simple example, let’s say a couple has a house with $100,000 in equity and their only other asset is a 401k account in husband’s name worth $100,000. If wife was awarded the house and husband was awarded the entire 401k account, it would be a 50/50 division. If instead neither party wanted the house and they put it on the market they could then split the net proceeds from the sale of the house 50/50 and also split the 401k 50/50. That would also be a 50/50 division.
What Real Estate Documents are Used to Transfer the House?
If instead of selling one spouse is awarded the house then in a typical case this requires just two real estate transfer documents. These should normally be done at the time of divorce along with the Divorce Decree and other transfer documents. The first document is a “Special Warranty Deed.” This document is signed by the spouse who is not getting the house and in effect it says that the other spouse is now the 100% owner of the house (subject to the debt secured by the house).
The second document is a “Deed of Trust to Secure Assumption.” This document is signed by the spouse who is getting the house and in effect it is that party’s promise to pay the existing mortgage in a timely fashion. If the party who receives the house falls behind on the mortgage payments or in any way defaults on the mortgage, the Deed of Trust to Secure Assumption gives the other party certain recourse against them. The details of that potential recourse are spelled out in the language of the Deed of Trust to Secure Assumption.
Divorce Transfer Does Not Remove Name from Mortgage
One important issue that is often misunderstood concerns the existing mortgage. In the scenario described above, the mortgage that is held in both parties names stays in both parties’ names, even after divorce. Parties sometimes assume that because they have agreed for one party to solely assume responsibility for the mortgage that this agreement is binding on the lender and all they need to do is call the mortgage company to get the name changed on the account. Not so. The lender will always refuse to do so.
The only way the other party will be relieved of that liability is if the mortage is paid off, either by refinancing it or by selling the property. In other words, the debt will remain on the credit report of the non-owning spouse until the debt is paid off. If the owning spouse goes into foreclosure then that will impact the credit of not only the owning spouse but also the non-owning spouse.
The bottom line is that if your spouse is being awarded the house in your divorce case, it is very much preferable if at all possible to have them refinance the property in their own name. Usually the refinancing can happen prior to divorce (or at least pre-approval obtained prior to divorce) or within a set deadline that is included as a term of the Decree.
I hope this helps clarify the issues surrounding how to deal with a house in a divorce case. If you have questions or comments please feel free to share them below.
As a Texas family law attorney for my entire career I have seen client after client be surprised by how the Texas Family Code requires that property be divided in Texas divorces. Most clients have heard that Texas is a community property state. While this is correct most people misunderstand what that means.
Texas Family Code Gives Court Broad Discretion in Property Division
Clients will say that they already know that since Texas is a community property state the property will be divided 50/50. The reality is that while Texas is a community property state, unlike many other community states the community property is not automatically divided evenly between the parties. The Family Code requires the trial court to divide the property in a “fair and just” manner. If you ask a qualified Austin family law attorney what this means they will tell you that a separate statute gives the court a list of factors that it can consider in making a disproportionate division (meaning that one side gets more than the other, such as 55/45).
The factors are many but the one that factors in most often is disparity of earning capacity. When one spouse makes significantly more than the other the court will often give the spouse with the lower earning capacity a larger share of the community property. The reasoning is that if the court were to make an equal division at the time of divorce it wouldn’t be equal for very long, due to one spouse greatly out earning the other spouse for a few years after the divorce.
Other factors courts can consider in dividing community property in a divorce include (but are not limited to) needs of the custodial parent, amount of separate property a spouse has, and fault.
Most Common Factor in Disproportionate Division: Income Disparity
A very common scenario that occurs in divorces is for the couple to consist of a primary breadwinner (frequently but not always the husband) and a spouse who works part time or not at all and is primarily responsible for taking care of young children. In this situation a court is likely to consider a disproportionate division in favor of the custodial parent. Part of the reasoning behind this is that being primarily responsible for raising children is likely to reduce one’s ability to advance their career and earn a high income.
Another Factor in Property Division: Amount of Separate Property
Another factor that courts can consider in deciding whether to make a disproportionate division is how much separate property a spouse has. Let’s use as an example a couple who got married at the time of marriage one of the spouses had a million dollars of separate property while the other spouse has no separate property. The marriage then created $200,000 of net community property for the court to divide at divorce. The court may very well consider making a disproportionate division in favor of the spouse who has no separate property.
Fault Can Also Play a Role
Lastly, the court can consider fault as a factor in making a disproportionate division. While fault does have an impact in some cases, it is far less frequently a significant factor in a disproportionate division than disparity of earning capacity or some of the other more commonly applied factors.
The main point here is that while Texas is a community property state that does not mean that the community property will be divided 50/50 in a divorce and there are a lot of variables that need to be considered. This is just another in the long list of reasons why everyone going through a divorce needs to be represented by a knowledgeable Austin family law attorney.
This video explains the basics of separate property in Texas. If you prefer, you can read the transcript below:
My name is Scott Morgan, I am a board certified family law attorney. In this video I am going to give an overview of separate property in Texas.
Texas is a community property state. In a Texas divorce case all property owned by either spouse is presumed to be community property. The court is required to divide the community property in a fair and just manner.
However, you can rebut this presumption if you can prove that an asset meets the definition of separate property. In that case the asset is confirmed as your separate property and not factored into the community property division. The court has no authority to award one parties separate property to the other spouse.
Under the right circumstances this can make a huge difference in the overall outcome of a property division.
So what is separate property? There are three types. First, certain types of personal injury recoveries are separate property, but this is quite rare. Second, gifts and inheritances are separate property. Finally, property that was owned by a spouse prior to marriage is that parties separate property.
A common complication is that separate property is not always easy to prove.
You must prove that an asset is your separate property by clear and convincing evidence. This evidentiary standard is significantly higher than the usual preponderance of evidence standard.
Additionally tracing the asset back to its origin can also be challenging.This is especially true with financial assets that have mutated and grown and moved into different accounts during the marriage.
The bottom line is that if you’re getting divorced and have significant assets that you believe might be separate property, you should get a very good family law attorney to help you prove those claims.
I hope this video has been helpful and informative. If you have any questions comments or suggestions for future videos please feel free to comment below.