Consumer debts tend to be a huge part of divorces, which my firm handles a lot. In terms of marital property in Texas, credit card debt is usually within the top six financial components within the household (along with the house, cars, mortgage, retirement accounts and car loans). Under Texas law, divorces can divide consumer debts, like credit cards; but courts cannot waive the liability of either spouse to a credit card held in both names.
There are many financial considerations during a divorce to put each spouse in the best financial position possible. It can be a complex arrangement to reach that goal. If you have a large amount of debt in a Texas divorce then you should work with a divorce attorney to ensure proper allocation of the debts.
Debt collection in Texas
As a Texas divorce lawyer I also often receive questions about credit card debt asking what the credit card companies and collection agencies can do to take property or demand payment. In Texas these questions fall under the Texas Debt Collection Act, Federal Debt Collection Practices Act and other Texas laws. Particular questions about what creditors can do to demand payment is very broad and better covered another time. Specifically, I will discuss what Texas law permits creditors of credit cards to do to obtain satisfaction of debts.
In Texas creditors issue two kinds of credit cards: unsecured and secured. These cards operate very differently in terms of the powers it provides the creditors to obtain payment from you. It is important to understand the difference in the event you find yourself unable to make payments. Both types of credit can appear in a Texas divorce. The difference between the creditor’s rights and who receives any property with debt attached is extremely important in the divorce. Your divorce lawyer will consider this distinction in working out a property division plan for your Texas divorce.
Unsecured credit cards in Texas
An unsecured credit card is one where the credit card company or bank issuing the card on behalf of the credit card company is giving you a line of credit with no collateral. This is the standard Mastercard/Visa/American Express/Discover card. They extend credit to you on the belief you will likely pay them back based upon your credit history. If you do not pay them, they can assess extra fees or increase the interest rate but they have absolutely no right to come down to your house and take any of your property.
If you keep not paying them, they keep adding late fees and over limit fees and interest keeps accruing. Usually your account will reach a point where it is so delinquent and they have added so many fees and unpaid interest that they can sell the account to a debt collector for a discount and still pay off what you charged plus make some profit. For example, they might charge off your account and sell it to a debt collector at fifty cents on the dollar. The debt collector will then try to collect the whole amount from you, or at least negotiate with you to receive more than they paid to get the debt from the original creditor.
Again, under normal circumstances the debt is not so large that the credit card company or debt collector will do anything other than bug you to make payments. However, they can sue you on the debt and try to obtain a court-ordered judgment against you for the amount owed. They can then obtain a lien on some property. Whenever you try to sell it the creditor receives payment first.
A big reason why this rarely happens in Texas is because Texas has very generous laws protecting the homestead and certain personal property from these kinds of judicial liens. Creditors cannot put liens on your home and rarely can find enough personal property of value to attach. If you didn’t have the money to pay your credit card then likely you do not have enough non-exempt property to attach with the lien. These creditor issues often arise in property division for Texas divorce lawyers.
Secured credit cards in Texas
The second kind of credit card is a secured credit card. Creditors generally issue these in one of two ways. One is a credit card secured by a bank account. A bank will offer a credit card to somebody with bad credit or no credit by requiring them to deposit a certain amount of money in a savings account with the bank as security for the credit card. Eventually the bank will release the security interest in the savings account as you prove you can pay the card. This is not always a bad deal for somebody trying to establish good credit but be mindful that these accounts often carry high interest rates and a variety of fees other cards may not charge, such as annual fees.
The other form of secured credit card is a store credit card. These are the credit cards you obtain through department and specialty stores, like Best Buy, Sears, Kohls, Macy’s, etc. Most people do not realize that these are secured credit cards; but this is almost always the case. The purchases on the card secure the debt. They replace the old method of financing large purchases, such as appliances, by application each time you make a purchase. Instead, they can charge you substantial interest and attach a security interest in everything you buy on the card.
When you do not pay a store credit card, they usually tack on extra fees and let the debt mount. Eventually they can enforce their security interests in the purchase. If you buy a new fridge at Lowes on their card and do not pay, they can get your fridge. They have the right to try to peacefully repossess the fridge by coming to your house and asking for it; but you probably will not let them come in.
So they can also foreclose on the fridge, sue you in court and obtain judgment to sell the fridge. They will then show up with the sheriff, take the fridge and sell it off. After they sell the fridge, you may still owe money because those fees and interest have added up. They don’t forget about it. They can also obtain a deficiency judgment in the remaining balance and obtain a lien like an unsecured creditor.
Consumer debts and credit card debts in a Texas divorce
A judicial lien will stay on your credit record and can attach to property for ten years. That is ten years of negative credit hits. Aside from the financial effect of mismanaging the property division in your divorce, a judicial lien will extend those problems for years to come. Negative credit hits affect interest rates, loan availability, insurance rates and even employment. Although a bankruptcy may help wipe out some judicial liens, that comes with its own challenges. For this reason, if you have a lot of debt in your marriage it is a good idea to work with a divorce lawyer to resolve your divorce and help you plan out a solution for the debts.