Private credit has grown quickly in recent years, and many Houston families now hold it. Wealth managers in River Oaks, The Woodlands and Sugar Land place clients in private credit funds, non-traded business development companies (BDCs) and interval funds. Business owners in Katy, Cypress and Pearland make direct loans to other companies, finance the sale of a business, or lend money to relatives. All of these are private debt, and all of them must be identified, valued and divided in a divorce.

Private debt looks simple because it pays interest and promises a return of principal. In practice, liquidity limits, credit risk and characterization questions make it far more complicated.

Forms of Private Debt You May See

Holding	How it works	Main divorce issue
Private credit fund (LP interest)	Fund lends to middle-market companies; investors receive distributions	Capital calls, lockups, GP consent to transfer
Non-traded BDC or interval fund	Registered vehicle with periodic repurchase offers	Limited redemptions each quarter
Direct loan to a business	Promissory note from a private company	Credit risk, collateral, documentation
Seller financing	Note received from the buyer of a business or property	Payment stream over years, default risk
Loan to a family member	Note, or informal advance, to a relative	Was it a loan or a gift? Collectibility
Real estate debt	Participations in mortgage loans or debt funds	Collateral value, payment status

Mezzanine debt, which often carries an equity kicker, has its own article: the impact of mezzanine financing interests on divorce settlements.

Characterization Under Texas Law

Under Texas Family Code Section 3.003, property possessed by either spouse at divorce is presumed community property. A loan made or a fund interest bought with marital money during the marriage is community property. A note funded with separate property, such as money owned before marriage or an inheritance, remains separate if it can be traced by clear and convincing evidence.

Two Texas rules matter here:

• Interest is income. Interest earned during marriage on a separate property note is generally community property, while the principal remains separate. Records should separate the two.
• Seller financing follows the asset sold. A note received for selling separate property is generally separate property, while a note received for selling community property is community property.

Loans to Family: Loan or Gift?

Money advanced to a child, sibling or parent is one of the most common disputes. One spouse calls it a loan that the community is owed. The other calls it a gift. Courts look at the evidence: whether there is a signed note, a repayment schedule, interest, actual payments and how the parties treated it at the time. An undocumented “loan” with no payments may be treated as a gift, or as a receivable with little practical value. Documentation made during the marriage carries more weight than documents created after the divorce is filed.

Valuation: Face Value Is Not Always Fair Value

A note’s face amount is only a starting point. Valuation experts consider:

• Credit risk: the borrower’s financial health and payment history.
• Collateral: what secures the loan and what it is worth.
• Interest rate: a below-market rate reduces present value; a high rate may signal high risk.
• Term: how long until principal is repaid.
• Liquidity: whether the investment can be sold or redeemed, and when.

For funds, the reported net asset value is the starting point, adjusted for timing, redemption limits and any discount a buyer would demand. Interval funds generally make periodic repurchase offers for only a portion of shares, so a large position may take several quarters to exit. See the impact of liquidity constraints on asset division.

A loan in default is worth less than its face amount and may be worth very little. Courts and mediators should not treat a doubtful receivable the same as cash in the bank. Our article on the impact of business debt on divorce settlements covers the other side of this equation.

Settlement Options

1. Award the note or fund to one spouse with an offset. Clean, but the receiving spouse takes the credit risk.
2. Split the payment stream. Each payment is divided as received. Fair, but requires collection, reporting and enforcement provisions.
3. Assign the note. Many notes can be assigned, sometimes requiring notice to the borrower. The borrower then pays each former spouse directly.
4. Redeem or sell. For fund interests, submit repurchase requests or sell on the secondary market and divide proceeds.

Any agreement should address who collects payments, who decides whether to enforce a default, how collection costs are shared, and what happens if the borrower pays off early.

Tax Considerations

Interest income is generally taxed as ordinary income to the person entitled to it. Funds may report income on Schedule K-1 or Form 1099, and some BDC distributions are characterized in different ways each year. Transfers of notes or fund interests between spouses incident to divorce are generally not taxable under Internal Revenue Code Section 1041, with carryover basis. For seller-financed sales reported on the installment method, transferring the note to a spouse can raise specific tax questions that a CPA should review. See the tax treatment of different asset classes in divorce.

Discovery Checklist

• Promissory notes, loan agreements, security agreements and guarantees
• Payment histories and bank records showing interest and principal received
• Fund subscription documents, statements and repurchase notices
• K-1s and 1099s for each year of the marriage
• Correspondence with family borrowers about repayment

Red Flags in Private Debt Holdings

Watch for these warning signs when reviewing a spouse’s private lending:

• Loans to entities the spouse controls. A note owed by the spouse’s own company may shift value between the business and the marital estate, and its terms deserve close review.
• Loans made shortly before or after separation. Large advances to friends, relatives or business partners near the time of separation can be a way to move money out of reach.
• No payments, no interest, no paperwork. An undocumented loan with no repayment history may be a disguised gift or a hidden transfer.
• Repayments that stop during the divorce. A borrower who suddenly stops paying may be cooperating with one spouse to delay income until after the decree.
• Payments routed to a new account. Interest and principal deposited somewhere other than the usual account can signal concealment.
• Collateral released without explanation. If security for a loan was quietly released, the note may now be worth much less.

Any of these signs justify targeted discovery and, where appropriate, a forensic accountant’s review.

Private Debt Divorce Help Throughout Greater Houston

Anunobi Law represents spouses with complex lending and credit portfolios across Houston, River Oaks, the Houston Heights, Sugar Land, Katy, Richmond, Missouri City, Fulshear, Stafford, Cypress, Spring, The Woodlands, Conroe and Pearland. Private debt often sits beside private equity holdings and other alternative investment funds. Learn about our high net worth divorce services, speak with a Houston divorce lawyer, or schedule a confidential consultation.

Frequently Asked Questions

Is a promissory note an asset in a Texas divorce? Yes. A note owed to one or both spouses is property that must be characterized, valued and divided.

Is money we lent to our son a community asset? It depends on whether it was a true loan or a gift. Documentation, interest and payment history are key evidence.

How is a private credit fund valued in divorce? Experts start with reported net asset value and adjust for redemption limits, timing and credit quality.

What if the borrower stops paying after the divorce? The agreement should say who bears that risk and who has authority to enforce the note.

This article is for general information and is not legal or tax advice. Reading it does not create an attorney-client relationship.