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What Happens to Debt in a Divorce?

Jonathan James | October 11, 2024

When we talk about financial matters in divorce, we often talk about dividing assets fairly and developing a plan for couples to keep illiquid assets intact. But that’s not the reality of every divorce: In fact, a great number of couples who are concerned with financial matters in divorce are concerned about what happens to debt in a divorce and how to divide it fairly.

Perhaps the most challenging issue regarding what happens with debt in a divorce is when one party has an obligation solely in their name. For example, a wife might have a credit card in her name that she’s run up to its $10,000 maximum while paying for household expenses: goods and services that both spouses have used throughout the marriage.

The good news is that what happens to debt in a divorce is often decided by a divorce decree, and that decree can address who takes on what debt. If her spouse decided to take that credit card debt on as part of the settlement, that could be written into the final decree. But the bad news is that regardless of what’s in the decree, the person whose name is on the account is still legally responsible for paying off any outstanding money owed. If the now-ex-spouse has agreed to pay down the credit card debt in the decree and doesn’t, the credit card company will continue to go after the wife, since she’s the only person whose name is on the account. And because Texas law states that a divorce decree can’t alter the rights of a third-party creditor, the now-ex-wife in our example is responsible.

Typically, most cases will have a mix of joint debt (in both parties’ names) and individual debt (which is, of course, in just one party’s name). While debt can be one of the most challenging topics of conversation while negotiating a settlement, there are several things you can do to minimize the conflict and contention that can arise around debt. Below is a list of five actions I recommend to help you protect your financial future after divorce.

Run a Credit Report

One of the first things you can do when trying to figure out what happens with debt in a divorce is get a copy of your credit report. Federal law allows you to get a credit report for free once every 12 months through annualcreditreport.com. By getting a copy of your credit report early in your case, you can identify debts that are in your name or held jointly with your spouse. This also can be helpful as you build an inventory of your assets and debts with your lawyer to make sure nothing is overlooked.

Use a Joint Credit Card

If you’re contemplating divorce and using credit cards or other lines of credit, it’s better to use one held jointly by both parties. Using credit in your name puts you in the position of incurring additional debt that you and you alone will be responsible for, regardless of what you write into your decree about who owes what. Using credit in your spouse’s name will have obvious, negative repercussions in the negotiations, particularly if you’re the one to file the petition or otherwise initiate the process of divorce. (Of course, it’s best to try not to increase debt prior to a divorce if you can at all avoid it.)

Use Community Assets to Pay Down Debt

If you’re looking to pay down debt prior to a divorce so that you don’t have to be concerned about what happens to the debt in a divorce settlement, use community assets to do so. If you’re waiting until the divorce proceedings to figure out how to divide up debts, make sure you know what is jointly and individually held debt and what assets are available to pay them down.

Include Specific Provisions Regarding the Payment of Debts in Your Divorce Decree

If assets are available or about to become available prior to the divorce (through, for example, the sale of a jointly owned house), I recommend specifically writing into the decree how assets will be distributed to deal with each specific debt. That allows each party to see it in writing, sign off on it, and take care of it as part of the divorce proceedings. Doing it then and there helps to safeguard divorcing couples against future conflicts and future legal proceedings.

There’s very little recourse for an individual to involve an ex-spouse in paying down individually held debt, regardless of what a divorce decree says, but there might not be assets available to cover the entirety of the debt, I do advise looking at the entire marital estate to see how to fairly compensate a party who might have incurred household debt in their name alone.

When there are insufficient assets to offset the debt in one spouse’s name, consider whether there are any alternative solutions to have a spouse pay a portion of the debt held in the other spouse’s name. For example, instead of paying the total debt at the time of divorce, could a spouse get a personal loan or use a balance transfer to a credit card in that spouse’s name for all or a portion of the debt?

Understand How Bankruptcy Affects Divorce

If the level of debt is so severe that bankruptcy might be a route that one or both parties need to investigate, make sure you’re aware of how different types of debt can or can’t be discharged in a bankruptcy. While credit card debt can typically be discharged in a Chapter 7 case, student loan and tax obligations typically can’t. Additionally, an automatic stay generally goes into effect when a bankruptcy suit is filed. This automatic stay can also hold up the portion of the divorce proceedings that relates to the assets and debts subject to the bankruptcy case. If you feel that filing for bankruptcy might be in your future, then it’s a good idea to talk to a bankruptcy lawyer to understand what your options are. Your family lawyer is one of the best places to go for referrals.

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Jonathan James is an experienced and talented negotiator and litigator for high-conflict legal cases who is frequently commended by clients for his responsiveness, professionalism, and integrity. He is Board Certified in Family Law by the Texas Board of Legal Specialization and is a member of the State Bar of Texas. Jonathan is trained in Collaborative Divorce and has been recognized as a Best Lawyers by The Best Lawyers in America from 2020-2024 as well as a Super Lawyers Rising Star from 2019 to 2024.

To learn more about protecting and maintaining your separate property in divorce, please contact Jonathan James at 214-473-9696.

For guidance on managing debt division in divorce, reach out to Jonathan James at 214-473-9696.

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