Selling a Note During a Divorce in Texas: A Practical Guide

Divorce is one of the most financially complex events in a person's life, and when a promissory note secured by Texas real estate is part of the marital estate, that complexity multiplies. A note is not like a bank account that can be split in half with a wire transfer. It is an illiquid asset that produces income over time, and dividing it fairly between two people who are separating their lives requires careful thought and, often, a creative solution.

For many divorcing couples in Texas, selling the note and splitting the cash proceeds is the cleanest and most equitable path forward. It eliminates the need to decide who manages the note, who bears the risk if the borrower defaults, who handles the taxes on the income, and who deals with the administrative burden of being a private lender. Cash is simple. Cash divides evenly. Cash lets both parties move on.

This guide addresses the specific considerations that arise when selling a promissory note during a Texas divorce. You will learn how notes are treated in the property division process, what your options are, how to navigate the sale efficiently, and how to avoid the pitfalls that can turn a straightforward transaction into a protracted battle.

How Promissory Notes Are Treated in Texas Divorce

Texas is a community property state, which means that most assets acquired during the marriage are considered jointly owned by both spouses regardless of whose name is on the document. A promissory note created during the marriage — for example, when the couple sold a property with owner financing — is almost always community property, meaning both spouses have an equal ownership interest.

Community Property vs. Separate Property

The first question in any divorce property division is whether the note is community property or separate property. A note is generally community property if the property that was sold to create the note was itself community property or if the note was created during the marriage using community funds or efforts. A note might be separate property if the underlying property was owned by one spouse before the marriage and was never commingled with community assets, or if the note was inherited by one spouse or received as a gift.

The characterization matters because community property is subject to division by the court, while separate property remains with the spouse who owns it. If there is any ambiguity about whether your note is community or separate property, your divorce attorney will need to analyze the specific facts.

Division Options for Notes

When a note is community property, the court has several options for dividing it. One spouse can be awarded the entire note, with the other spouse receiving other assets of equivalent value to offset it. The note can be sold and the proceeds divided between the spouses. The note can be divided into portions, with each spouse receiving a defined share of the remaining payments. Or a partial sale can be structured where enough payments are sold to generate cash for one spouse while the other retains the remaining payment stream.

Of these options, selling the note and dividing the cash is by far the most common and usually the most practical. It creates a clean break, eliminates the need for ongoing interaction between the spouses regarding the note, and converts an illiquid asset into liquid funds that each spouse can use as they see fit.

Why Selling the Note Is Usually the Best Option in Divorce

While there are multiple ways to handle a promissory note in a divorce, selling it outright has compelling advantages that make it the preferred choice in most situations.

Clean Division of Assets

Cash divides cleanly. A note does not. If one spouse keeps the note, the other spouse needs to receive assets of equivalent value as an offset. But determining the "equivalent value" of a note is itself a point of contention — the note's face value, its market value, and its present value are three different numbers, and each spouse's attorney may have a different opinion about which one should be used. Selling the note on the open market establishes an objective, market-determined value that eliminates this disagreement.

No Ongoing Entanglement

If the note is split or one spouse is awarded it with an offset, the spouses may need to remain in contact regarding the note — reporting income, sharing tax documents, coordinating if the borrower defaults, or managing the eventual payoff. For most divorcing couples, minimizing ongoing financial entanglement is a priority. Selling the note and distributing cash eliminates any future connection related to the note.

Immediate Liquidity

Divorce is expensive. Legal fees, setting up a new household, deposits, moving costs, and the general financial disruption of splitting one household into two create immediate cash needs. Selling the note generates a lump sum that can help both spouses address these needs and establish financial stability in their separate lives.

Risk Transfer

A promissory note carries ongoing risks — the borrower could default, the property could lose value, or economic conditions could change in ways that affect the note's performance. By selling the note during the divorce, both spouses transfer these risks to a professional note buyer and walk away with certain cash. Neither spouse has to worry about waking up six months after the divorce to discover that the borrower stopped paying and the note they were counting on is now worthless.

The Process of Selling a Note During Divorce

Selling a note during a divorce follows the same general process as any other note sale, with a few additional steps related to the divorce proceedings and the requirement for both parties' agreement.

Step 1: Agree on the Decision to Sell

Both spouses typically need to agree to sell the note, especially if it is community property. This agreement may come through direct negotiation between the spouses and their attorneys, through mediation, or through a court order if the parties cannot agree. In many cases, both spouses quickly recognize that selling is the most practical option and the agreement is straightforward.

If one spouse wants to keep the note and the other wants to sell, the spouse who wants to keep it can buy out the other's interest at the note's fair market value. A professional note buyer's offer can serve as an objective market valuation for this purpose — it establishes what a willing third party would pay, which is the most defensible definition of fair market value.

Step 2: Gather Documentation

Assemble the standard note sale documentation package: the promissory note, the deed of trust, the payment history, the title insurance policy, proof of hazard insurance, and any supporting property information. This is the same package you would prepare for any note sale. Both spouses or their attorneys should have access to these documents. For a complete documentation guide, see this resource on documents needed to sell a note in Texas.

Step 3: Get a Market Valuation

Request cash offers from one or more reputable note buyers. The offers serve a dual purpose: they tell you what the note is actually worth on the open market, and they provide the basis for the sale if both parties agree to proceed. An experienced buyer like Longhorn Note Buyers can provide a cash offer within 24 hours.

Having a professional market valuation is extremely useful in divorce negotiations because it establishes an objective, third-party value for the note. Instead of arguing about what the note is "worth" based on each side's calculations, you have a real offer from a real buyer — a number that someone is willing to pay today.

Step 4: Obtain Court Approval if Required

Depending on the status of your divorce proceedings, you may need court approval to sell the note. If the divorce decree or a temporary order addresses the disposition of the note, follow those instructions. If the sale is being negotiated as part of the overall property division, the agreement to sell can be incorporated into the mediated settlement agreement or the final decree.

Your divorce attorney can advise on whether court approval is needed and how to obtain it. In most cases, this is a routine step that does not significantly delay the process.

Step 5: Close the Sale

Both spouses — or their authorized representatives — sign the closing documents, which include the endorsement of the promissory note and the assignment of the deed of trust. The purchase price is wired to a designated account, which may be an attorney trust account that holds the funds pending distribution according to the divorce agreement.

After closing, the funds are distributed between the spouses according to whatever agreement or court order governs the property division. The note is out of the picture, and both parties have their cash.

Valuation Challenges in Divorce

One of the most contentious issues when a note is part of a divorce estate is determining its value. This section addresses the most common valuation challenges and how to resolve them.

Face Value vs. Market Value

The face value — or remaining balance — of the note is not the same as its market value. A note with a remaining balance of $150,000 might sell for $120,000 on the open market because of the time value of money, borrower risk, and market conditions. In divorce proceedings, using face value to divide the note would be unfair to the spouse who receives the note because they are getting an asset worth $120,000, not $150,000.

The market value — what a willing buyer would pay a willing seller in an arm's length transaction — is the appropriate measure for division purposes. Getting actual offers from note buyers is the most reliable way to establish market value. This eliminates the need for theoretical calculations and gives both parties a concrete number to work with.

Present Value Calculations

Some divorce attorneys or financial experts calculate the "present value" of the note's remaining payment stream using a discount rate. While this approach has theoretical validity, it introduces subjectivity because the discount rate used can significantly affect the result. A 6 percent discount rate produces a very different present value than a 10 percent rate, and each side's expert may have a different opinion about which rate is appropriate.

A market offer from a professional note buyer sidesteps this debate entirely. The buyer's offer IS the present value as determined by an actual market participant with real money on the line. It is hard to argue with a number that someone is willing to write a check for.

Disputes About Property Value

The value of the property securing the note affects the note's market value through the LTV ratio. If the spouses disagree about what the property is worth, this disagreement can spill over into the note valuation. Again, the practical solution is to let the market decide — a note buyer will obtain their own independent property valuation during due diligence, and the purchase price they offer reflects their assessment of the collateral. For more on how property value and other factors drive note pricing, see this guide on what determines note value in Texas.

Tax Implications of Selling a Note During Divorce

The tax treatment of selling a note during divorce depends on several factors, and professional tax advice is essential.

Installment Sale Notes

If the note was created through an installment sale, selling it triggers recognition of any remaining deferred capital gain. In a divorce context, the question of which spouse bears the tax liability depends on the timing of the sale relative to the divorce and the terms of the property division agreement. If the sale occurs before the divorce is final, the gain may be split as community income. If it occurs after, the allocation depends on the decree.

Property Division Is Generally Not Taxable

Under IRC Section 1041, transfers of property between spouses incident to divorce are not taxable events. This means that if one spouse is awarded the note and then sells it, the tax consequences fall on that spouse alone. If the note is sold jointly before or during the divorce, the tax consequences are typically split according to each spouse's ownership interest.

The interplay between installment sale rules, divorce property division rules, and capital gains taxation can be complex. Engaging a tax professional who understands all three areas is the best way to avoid surprises. For a general overview of note sale tax considerations, see this resource on tax implications of selling a note in Texas.

Practical Tips for Selling a Note During Divorce

The emotional dynamics of divorce can complicate what is otherwise a straightforward financial transaction. These practical tips help keep the process on track.

Agree on a Process, Not Just an Outcome

Before diving into the details of the note sale, agree with your spouse and your attorneys on the process you will follow. Who will contact the note buyers? Who will provide the documents? How will offers be shared and evaluated? Who will sign the closing documents? Having a clear process reduces conflict and prevents delays caused by procedural disagreements.

Use the Note Buyer's Offer as an Objective Benchmark

In heated divorce negotiations, objective data is invaluable. A cash offer from a reputable note buyer provides a market-based valuation that neither side can easily dismiss. Use it as the basis for your discussion rather than theoretical calculations that are subject to manipulation by either side's financial expert.

Move Quickly

The longer a note sale drags on during divorce, the more opportunities there are for complications. The borrower might fall behind on payments. Property values might shift. Market conditions might change. One or both spouses might change their mind. Moving efficiently from agreement to offer to closing minimizes these risks and gets both parties their cash faster.

Keep Emotions Separate From Financial Decisions

It is natural to have strong emotions during divorce, but allowing those emotions to drive financial decisions about the note rarely leads to good outcomes. Refusing to sell because your spouse wants to sell, or insisting on an unrealistic price because you feel entitled to more, only hurts both parties. Focus on the objective market value, divide the proceeds fairly, and move on.

Consider a Partial Sale If Full Agreement Is Elusive

If one spouse wants to sell and the other wants to keep the note, a partial sale can sometimes bridge the gap. Selling enough payments to generate the cash that the first spouse wants while preserving the income stream for the second spouse gives both parties what they need. The partial sale proceeds go to the spouse who wants cash, and the remaining payments continue flowing to the spouse who prefers income. For more on how partial sales work, see this comparison of full vs. partial note sales.

Why Longhorn Note Buyers for Divorce-Related Note Sales

Longhorn Note Buyers has extensive experience working with divorcing couples and their attorneys on note transactions that are part of property division. They understand the sensitivity of the situation, the need for clear and objective valuations, and the importance of moving efficiently to close the deal and let both parties move forward.

With over $47 million in notes purchased, an A+ BBB rating, and a 100 percent close rate, Longhorn provides the reliability that both parties need. Their 24-hour turnaround on offers gives attorneys and mediators a concrete number to work with in negotiations, and their typical two-to-four-week closing timeline means the note can be resolved before the ink is dry on the divorce decree.

Ready to Sell Your Note?

If you are going through a divorce in Texas and a promissory note is part of the marital estate, the first step toward resolution is understanding what the note is worth. Contact Longhorn Note Buyers today at (210) 828-3573 or visit longhornnotebuyers.com to get your free, no-obligation cash offer within 24 hours. Use the offer as a tool in your negotiations or as the starting point for a sale that converts an illiquid, complicated asset into clean cash that both parties can divide and use.

Frequently Asked Questions

Can one spouse sell the note without the other's consent during a divorce?

Generally no. If the note is community property, both spouses have an ownership interest and both typically need to agree to the sale. Additionally, once a divorce is filed, most Texas courts issue standing orders that prevent either spouse from disposing of community assets without the other's consent or court approval. Attempting to sell the note unilaterally could result in legal consequences and complicate the divorce proceedings.

How is the note's value determined for property division purposes?

The most reliable method is obtaining an actual market offer from a professional note buyer. This provides an objective, third-party valuation based on what a willing buyer would pay in an arm's length transaction. Alternatively, a financial expert can calculate the present value of the note's payment stream, but this method involves subjective assumptions about discount rates and risk that can be disputed by the other side.

What if we created the note together but only one name is on it?

In Texas, community property belongs to both spouses regardless of whose name is on the document. If the note was created during the marriage using community property or community efforts, it is community property subject to division even if only one spouse's name appears on the note and deed of trust. The name on the document affects who has the legal authority to sign closing documents, but it does not determine ownership for property division purposes.

Can the divorce court order us to sell the note?

Yes. A Texas divorce court has broad authority to divide community property in a manner it considers just and right, and this can include ordering the sale of a promissory note and the division of the proceeds. If the parties cannot agree on how to handle the note, the court can order a sale as part of the final property division.

What happens if the borrower defaults during the divorce process?

A borrower default during divorce complicates the situation because the note's value may decrease and the spouses need to decide jointly how to respond — whether to pursue foreclosure, negotiate with the borrower, or sell the note as-is at a reduced price. This is another reason why selling the note early in the divorce process is often advisable — it eliminates the risk of a default occurring while the spouses are still sorting out the property division.