Debt and Marriage – My Spouse wants to refinance our house to pay off their personal debt

Whether a debt is in your name, your spouse’s name, or both names, if you and your spouse incurred the debt after the marriage, you both are equally liable for payment. If one of you incurred the debt before the marriage, that party is solely responsible for paying it.

Early signs

Often, before a party files for a divorce, they have already contemplated what will be in their best interest from a financial standpoint. They may begin to move money from accounts or attempt to transfer property to another party to avoid division by the courts. We have represented many parties wherein one of the parties has refinanced the community home and used the money to pay off their own personal debt before filing for a divorce. While a refinance may be necessary in your situation, it is best to fully understand how the refinance and payment of debts can affect you and your spouse post-divorce.

Points to consider

The benefits you receive will depend on who retains the house in the divorce or whether someone sells it. The following are some pros and cons that you need to be aware of:

• Either party will likely be solely responsible for the loan post-divorce and now the loan is higher
• One spouse is paying off one of the debts, while the other spouse may get stuck paying their own debt and the house loan.
• Either party may need to obtain an equity loan or refinance post-divorce and may not be able to do so due to the loss in equity and recent refinance
• If either party sells the home during the divorce or later, the amount of equity will decrease, leaving less proceeds for each party.
• Since the loan has increased and the amount of equity has decreased, if a party must pay a portion of the house’s equity to their spouse, this amount will be lower
• If a spouse is paying debts they incurred before marriage, this is taking money from the community estate to benefit the spouse’s separate debt

Know your rights with Debt and Marriage

If you find yourself in a situation where you must refinance to pay debts, ensure that you pay community debts first and prioritize the ones in both of your names before addressing any debts solely in your spouse’s name. Texas Family Code Chapter 3 outlines Marital Property Rights and Liabilities.   If you are uncertain or lack control over which debts you will pay and your spouse is trying to refinance your home, consult with an Attorney at Graham Family Law before you sign any documents.