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How a Divorce Court Treats Spousal Judgments and the “6-Month Homestead Rule”

Jan 20, 2022 | Divorce

How a Divorce Court Treats Spousal Judgments and the “6-Month Homestead Rule”

            A suit for divorce involves the characterization and division of all assets and liabilities owned by the parties, whether individually or jointly. This post will focus more specifically on the handling of marital liabilities. When dealing with the characterization of property, it is crucial to establish whether the property is either community or separate property. While the concept of “community debt” is often referred to as a legal fiction, under current law, there is a system in place to determine which spouse is liable for which debts.

This analysis can be particularly important when one spouse is involved in alternative litigation in which a judgment was awarded against that spouse during the marriage. This can be common when one spouse owns a business entity that was involved in litigation, whether in the capacity of the business or the personal capacity of the spouse. When one spouse is personally liable for a monetary judgment, it is necessary to consider who or what property is liable for the judgment.

            Often times, the marital residence is one of the largest assets owned by a married couple. In general, when a judgment creditor is seeking to enforce a judgment against one or both spouses, it will attempt to encumber any property owned by the individual to satisfy the judgment. A Court does not have the power to impose a judicial lien on the marital residence for satisfaction of the judgment against a spouse. Texas law provides strict protections against a judgment creditor from being able encumber one’s homestead to satisfy the judgment. The law is well-established regarding the protection of one’s homestead.

It is not uncommon for a divorcing couple to decide to sell the marital residence in order to effectuate a fair and equitable division of the community estate in the final divorce decree. When the marital residence is the couple’s most valuable asset, the sale of the marital residence might be necessary in order for both spouses to leave the marriage with his or her fair share of the assets. When there are also outstanding judgments to be divided, consideration of how and when the judgments will be paid is critical. A well-versed family law attorney will be able to offer a strategic plan on how to protect your assets from satisfaction of a judgment.

Texas has a long and proud history of protecting homestead property. When homestead property is sold, Texas law provides a protection for the sales proceeds for six months. The individual’s proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale. This provision is commonly referred to as the “6- Month Rule” or the “Texas Proceeds Rule”. In other words, one can protect the proceeds from the sale of his or her homestead by reinvesting the same funds into another homestead within 6 months of the original sale. A family law attorney understands the implications of this rule and how to procedurally control funds from the sale of the homestead to ensure its protection against creditors.

There are other nuances involved in homestead protection that a family law attorney is able to navigate. Judgement liens recoverable by a creditor can be determined invalid as to a spouse and any property owned by that spouse after the date of the divorce, whether acquired by that spouse either prior to or subsequent to that date. When major assets and obligations are subject to division in a divorce, it is crucial that an experienced family law attorney is steering the way. Considerations in a divorce not only include asset and debt division at the time of divorce, but how those assets and debts will affect a party in the long-term, well after the date of divorce.  If a spouse receives proceeds from the sale of the home as part of the division of marital property, knowledge of Texas homestead laws is material in determining how to treat such funds subsequent to the divorce.

When dealing with a high-value marital residence and large obligations during marriage, the division of the marital residence can become contentious between spouses. When one spouse is subject to large judgments, it is not uncommon for that spouse to want to dictate all the terms of the sale of the residence, or to prevent the sale altogether after the divorce is completed. Such spouse can feel vulnerable to attack by judgment creditors when he or she comes into a large sum of money as a result of the sale of the residence.

To better control the sale of the home, or to ensure that the sale actually occurs when one spouse is in disagreement to the divorce decree that orders the sale of the home, a spouse can file a motion with the Court requesting the Court to appoint a receiver to conduct the sale of the home. The effect of the appointment of a receiver converts the control and decision-making of the sale from the spouses to the receiver. A receiver can control aspects of the sale of the residence including but not limited to, selection of real estate agent, determination of listing and sale price, acceptance or negotiation of offers, conditions in which to sell the residence, signing of necessary documents for sale of the residence, etc. After a divorce, a receivership is effective in ensuring the sale of the residence but can also be costly depending on the value of the residence. A receivership is certainly an option to be considered when such high-value assets and obligations are at issue in a contentious divorce.

Seeking the advice of a family law attorney to assist in the division of a high-asset marital estate and to provide an understanding of such effects is in the best interest of spouses who cannot see eye-to-eye. The marital residence is typically a major investment with multiple legal implications that must be dealt with.