Dealing with Debt in Divorce: Part One

This article was written by Hance | Wickham associate attorney Jonathan James.

 

When we talk about financial matters in divorce, we often talk about dividing assets fairly and developing plans 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 with debt and how to divide it fairly.

 

Perhaps the most challenging issue regarding debt and divorce comes when one party has debt solely in his or her name. Let’s say, for example, the wife in a divorce case has a credit card in her name, and she’s run it up to its $10,000 maximum. And let’s say that most of that debt was incurred for household expenses – goods and services that both the husband and wife have used over the course of the marriage.

 

The good news is that a divorce decree can address who takes on what debt in a divorce – so if the husband 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 to pay off that debt. If the now-ex-husband 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 still on the hook for the debt. Showing the credit card company the divorce decree will not have any effect on the situation – the credit card company will continue to attempt to collect from her and only her.

 

While she would have no legal recourse immediately, there’s one route she could take – since she and her now-ex-husband have a legal agreement that he’ll pay the debt, she can pay down the debt herself and then sue him for breaching their agreement. In this case, it’s likely that she could win back what she paid to the credit card company – but, in the meantime, she has to incur that expense on her own, and can only involve the courts once it’s paid off.

 

If both parties did not agree to the decree, however, that changes things as far as the Texas courts are concerned. I have had cases in the past in which one party had incurred significant student loan and credit card debt, and the decree dictated that the other party pay off the debt. However, the other party failed to respond to the divorce petition, and because Texas law allows one party to move forward with the divorce even if the other party doesn’t participate, the party I was representing went to court and finished the divorce without the other party's involvement. A person in this situation actually has very little legal recourse, despite having a legal document saying someone else will pay down his or her debt.

 

Let's say it's a case where a decree says an ex-husband will pay his wife's credit card debt. If she were to pay off the debt entirely, she may be able to sue him for reimbursement, but that would still require her to first pay debt the decree stated he should pay.  Then she would be left trying to recover money from him through limited options in Court because she would not have an underlying contract to sue him on because he didn’t agree to the divorce. He did waive his rights to weigh in on the division of the assets and liabilities of the marriage by failing to respond to the divorce lawsuit, which is a more common occurrence in Texas than you might think. If he were to fail to pay child support designated from a decree, for instance, she would have legal recourse regardless of whether he signed the decree or not. But in this situation, involving a debt solely in her name, she would have very limited legal recourse to collect.

 

In my next article on this topic, I’ll discuss strategies that couples can and should take, before and during a divorce, to address both their individual and shared debt.