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Bank Accounts and the "Community Out First" Rule
October 28, 2014

Photograph of a piggy bank, paper cut out of a family of four and a house with a key hanging off the chimneyMany individuals come into a marriage with a bank account already set up. If the balance in your pre-marriage bank account is significant, then the "community out first" rule will have a big impact on how much of your account balance is exposed to creditors and subject to division during a divorce.

Texas is a community property state, which means a married person's assets are either separate property or community property. Separate property is any property owned or claimed before marriage. Separate property also includes property inherited or received as a gift during marriage. Finally, separate property also includes any recovery for personal injuries sustained during marriage, excluding recovery for loss of earning capacity. Community property is any property acquired during marriage that is not separate property. Community property belongs to both spouses and can be divided between spouses during divorce. Community property is also much more exposed to your spouse's creditors versus your separate property.

Now let's use an example to apply these marital property rules to a bank account. John has a checking account with Chase Bank where he deposits his earnings. John's checking account has a balance of $55,000.00 as of 10/21/2013. John marries Jane the next day on 10/22/2013. Like most people, John doesn't change the way he deposits his earnings after he marries Jane, and John keeps depositing his earnings (and nothing else) into his Chase checking account. As of 10/22/2014, John's checking account has a balance of $85,000.00. So how much of the $85,000.00 is John's separate property? It depends on whether the balance in John's checking account ever dipped below $55,000.00 during the year he was married. Let's assume John's checking account never dipped below $55,000.00 during John's first year of marriage. In that case, $55,000.00 is John's separate property and $30,000.00 is community property. Now let's assume instead that John bought Jane a diamond necklace for Christmas, and the diamond necklace caused John's account's balance to dip to $45,000.00 in December 2013. John then raised the balance (with his earnings) to $85,000.00 by October 2014. In that case, only $45,000.00 of the $85,000.00 in John's account is John's separate property. The other $40,000.00 is community property.

What we described above is the "community out first" rule. When you have a bank account with both separate property and community property cash, think of the separate property cash as the bottom layer and the community property cash as the top layer. Any money that comes out of the bank account first comes out of the top layer of community property cash. Only when that top layer of community cash is gone will the second layer of separate property cash come out. However, any amount of separate property cash taken out is gone for good. So in the case of John and his Christmas gift, when John's account dipped $10,000 below $55,000.00, that means John took out $10,000.00 of his separate property cash ($55,000 - $45,000 = $10,000). That $10,000.00 of separate property is gone for good, and only $45,000.00 of the original $55,000.00 in separate property is left in John's account.

So why should you care how much separate property cash is in your bank account? First, if you ever divorce, your spouse has no right to your separate property cash. It belongs to you alone. Second, if your spouse is ever successfully sued, the person who sued your spouse generally cannot get to your separate property cash. Read our article The Reach of Your Spouse's Creditors for a more detailed explanation on how the community/separate property distinction affects what assets your spouse's creditors can go after.

If you have questions about the character of the funds in your bank account, contact Sugar Land divorce attorney Chikeersha Puvvada at 832-317-6705 or online today to schedule a free 30 minute consultation.

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