Credit card collections: Community property throws a wrench in generic advice

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.
Here is how it works. We’ll take an imaginary married couple – Ernest and Mary – and walk through the law.
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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 the purpose of 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.
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 collect from the community property owned by Ernest and Mary. 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 nonexempt assets to pay the judgment against Ernest.
Notice I threw in the qualifier “nonexempt.” That is because Texas law makes certain assets exempt from collection. That, however, is a topic for another column.
Let’s dive a bit more into the weeds regarding community property and collectability. Community property is divided into three categories:
• Community property subject to Ernest’s sole management, control and disposition.
• Community property subject to joint management.
• Community property 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.
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.
Bottom line: Ernest is the one who will be sued, but both Mary and Ernest will have to pay the resulting judgment.
Don’t believe everything you read.
Attorney Virginia Hammerle is board certified in civil trial law by the Texas Board of Legal Specialization and an accredited estate planner. To receive her monthly newsletter, contact her at [email protected] or visit hammerle.com. This column does not constitute legal advice.