Because Texas is a community property state, community property is considered to be owned jointly by the couple. Therefore, when a couple divorces in Texas, they must go through the property division process in which all of their community property is divided equally between both parties. Community property is generally defined as property and assets acquired by the couple during the course of their marriage.
When getting divorced, couples must be very careful about handling their finances, especially their shared finances. Not only can divorce be an expensive process, but you must be cautious that you don't mistakenly misuse community funds. Additionally, though it may be tempting, you should never attempt to deplete or hide community assets. Doing so may result in accusations of misappropriation of funds.
Misappropriation vs. Hiding Assets
Misappropriation of funds occurs when one party takes money or assets belonging to the community (the married couple) and uses that money either for their own ends or in a way not in the community's best interest with the intent to deprive the other spouse of those funds. This is illegal and is considered theft. If found guilty of misappropriation during a divorce, the guilty party may face serious consequences.
Examples of misappropriation of funds include:
- Gambling with community funds or assets
- Spending community funds on a significant other
- Using the money to go on vacation
- Making large purchases for yourself
- Going on a shopping spree
Relatedly, it is very important that neither party attempts to hide assets from the divorce process. Divorce is a stressful, emotional time, and it is not unheard of for someone to hide assets to keep their former partner from accessing them. For example, someone may have a secret bank or retirement account that they do not disclose during property division. Even something as simple as intentionally failing to disclose certain property is considered to be hiding assets. Like misappropriation of funds, hiding assets is illegal and a form of theft.
Actual vs. Constructive Fraud
In the Texas Family Code, mishandling of community property is legally referred to as actual and/or constructive fraud on the community. Actual fraud occurs when one party has diverted funds from the community estate with the intent to deceive or deprive the other spouse (hiding assets in a secret bank account may be considered actual fraud on the community). Constructive fraud occurs when one spouse misuses community funds or doesn't act in the estate's best interest (misappropriation of funds is an example of constructive fraud on the community). You may also see constructive fraud described as a breach of fiduciary duty.
Reconstituting the Estate After Actual or Constructive Fraud
According to Texas Family Code Sec. 7.009, if the judge determines that actual or constructive fraud has occurred, they will reconstitute the estate. This means that they will identify the value that was depleted from the state due to fraud and add that number to the total current value of the estate. They will then use this new, reconstituted number when dividing the estate between the two parties.
Texas Family Code notes that the courts "may grant any legal or equitable relief necessary to accomplish a just and right division" when reconstituting the estate. This may include granting the wronged spouse their fair share of the estate as if the misappropriation had not occurred, awarding a money judgment in favor of the wronged spouse, or both.
For example, if the estate is worth $100,000, and one party misappropriated or intentionally wasted $20,000, the total current value is only $80,000. The court will then reconstitute the estate back up to $100,000 and divide this higher number between the two parties, assigning each $50,000. Consequently, the wronged spouse will receive the full $50,000 that they are entitled to.
What To Do If You Believe Fraud on the Community Has Occurred
Dealing with the misappropriation of funds can be challenging. You should collect and document any evidence that misappropriation, misuse, or hiding of assets has been committed. Your next step should be to reach out to our law firm for guidance. The Law Firm of Johnson & Gaskill PLLC has helped many clients deal with instances of fraud on the community during divorce cases, and we are prepared to use our experience to help you with your case.
Similarly, if you are being accused of misappropriation of funds or some other fraud on the community charge, you should speak with an attorney as soon as possible. It is not unheard of that one party, in the hopes of damaging their spouse's reputation, will make fraudulent claims of misappropriation in an attempt to secure what they think will be a better divorce settlement. In cases like these, you need to act quickly. We can help.
If you are going through a divorce and believe fraud on the community has been committed, send us a message online. We are standing by.