Studies suggest the average household in Texas has roughly $7,000 in credit card debt. When adjusted to include only households with credit card debt that number increases to over $15,000. Debts owed by a married couple at the time of divorce may include significant credit card debt in addition to car loans, mortgages, 401k loans, personal bank loans and business debts.
Debts are part of a divorce whether parties hire divorce attorneys in Texas or do it themselves. To avoid the debt issues leaves risky financial problems waiting to blow up in the future. That is something neither spouse needs. Today’s post will discuss how debts relate to divorce and how a divorce attorney can help solve these problems.
The creditor’s rights and your Texas divorce
It’s common to think about debts in the property division phase of the divorce like assets with a negative sign. In a sense this makes sense (at least if one ignores the future interest payments). Unlike deciding who gets the TV, debts come with legal rights held by third parties. The creditor’s rights deserve consideration when dealing with debts in a divorce.
Creditor’s rights are born out of the contract that formed the debt. The creditor’s rights to payment attach only to the parties who accepted liability and any property secured against the debt. Creditors cannot enforce their rights against anybody not a party to the debt contract or any property not specifically attached to the debt.
Similarly, a family court cannot deprive a creditor of its rights to the debt in a divorce. The judge cannot take the husband’s debt and make it the wife’s debt or vice versa. Property securing debt may not be sold out from under the debt without invoking the creditor’s rights. Debts owned jointly by the spouses cannot be split 50/50. They remain 100% the joint responsibility of each ex-spouse.
This can be a real problem in many situations. When one spouse signed on most of the debts that spouse will leave the marriage with tremendous debt. The other will walk away virtually scot-free although the debts accrued for the joint benefit of the former spouses. It can also present a problem when both spouses are jointly liable on the debts.
If neither spouse pays the bills then the creditor can come after either or both to satisfy the debt. If one spouse declares bankruptcy then the other spouse may be stuck with all the responsibility. These are just a few examples of problems that arise.
Some options to deal with debts in a Texas divorce
There are ways to address the debts in the divorce but none are perfect solutions. The “right” solution is highly specific to the debts and assets of the spouses and their needs. Sometimes a mixture of options is necessary to build the best solution for the debts.
Parties adjust the asset division to account for the debts each party takes
This is an effective option when the parties can afford whatever debts are in their name and the property can be fairly divided to account for the debts. It may be a problem for the parties if the continued debts will make it difficult for either party to obtain a new home, vehicle, or other basic needs after the divorce because that person’s debt to income ratio is too imbalanced.
Jointly secured debts require a belief that the debt will be paid by whoever agreed to pay it.
This method typically is not a good idea when there are not assets available to make the assumption of debt payments fair or when the person taking on the debt payments lacks the income to safely make the payments.
It’s a bad idea for the person taking on the debts and if the debt is held in both names then it’s a bad idea for both people because the other spouse may end up having to make the payments to avoid the credit hit (or worse) from nonpayment.
There’s also issues of offsetting debts accruing interest against assets that either lose value over time or may increase in value at a rate lower than the interest rate on the debt.
Parties indemnify each other for the debts in the divorce decree
When one spouse indemnifies the other on a debt through the divorce decree it means the indemnifying spouse will make the payments on the debt. The other spouse obtains the right to sue the indemnifying spouse if the payments fail. This is one way parties can deal with debts when there is an imbalance in debt obligations or to divide debt liability held by both parties.
So husband may have $20,000 owed on a credit card that was exclusively to pay bills on the marital home. He’s the only signer on the account but wife benefited equally from the debt. So the wife could agree to indemnify the husband for half of all the payments and she agrees to send in her half of the payment every month.
Well if wife loses her job and cannot afford the payments then the husband still has to make the full payment on the credit card. His remedy is to sue the wife to recover her half of the payments but if she doesn’t have the money for the credit card then she doesn’t have money to pay the husband, either. That’s the big problem with using indemnification in a divorce.
This approach works as long as whoever is taking on responsibility for the payment has and will have the means to make the payments and the parties trust each other to make payments on the debts.
It requires a belief that the person responsible for payment won’t lose his or her job, will make the payments and will live long enough to make the payments. If the other person named on the debts cannot make the payments himself or herself then the indemnification carries a significant financial risk.
Refinance the debts
This resolves the problem of having one spouse owe debts that the other spouse pays by changing the creditor’s rights. This is by creating new debt that pays off the old debt. The new debt belongs to whoever has responsibility for payment of the old debt. For credit cards this can occur by balance transferring to a new card or taking out a personal loan.
Mortgages and other secured debts refinance into a new loan that continues the security against the property. The huge benefit here is that it completely separates the spouse’s liability to one another for the debts each party walks away with.
However, refinancing is only as effective as it is available. Sometimes refinancing isn’t an option. This may be because no creditor wants the debt or because the person lacks the creditworthiness to obtain new debts. It can be an expensive option, especially when refinancing mortgages. It can also be a poor choice when one can refinance debts but the individual taking the debts will lack ability to make payments.
Pay the debts
This isn’t always the fun option but sometimes you are best off by paying the debt before the divorce. It frees everybody from the debt. Like refinancing it’s an option only as effective as it is available.
You may not have the pile of cash needed to pay off the debt. Or you may have the funds but by burning them on the debt now you may not have the ability to pay other needs. If the money just isn’t there then this option is off the table.
Sometimes the money becomes available by selling property. I don’t mean pawning your DVDs for $1. I mean property of value. It may mean selling the house to pay the mortgage and let the parties find new homes.
Similarly it may be necessary to downgrade cars to get into a more affordable debt scenario. That’s tough. We tend to have emotional attachments to our houses and other property. The tough decision may be necessary to move past the divorce and reach a financial secure place.
What should I do in my Texas divorce?
Each divorce is highly specific. The income, debts, assets and needs of each party will weigh on sorting out feasible debt plans in the divorce. Often when involving significant debt it makes sense to hire a divorce attorney with experience dealing with financial assets. Some debts under Texas law are not divisible even if the funds from the debt were for marital purposes. By incorrectly approaching the debts in your divorce you may be saddling yourself with debts you do not owe.