How are debts dealt with in family law property settlements? September 2, 2020

If you’re dividing property after separating from your former partner, you need to be clear about how any debts will affect your property settlement

Often, in family law property settlements, the focus is on assets: identifying them and working out how to divide them. But this is only part of the picture. Debts and other obligations, such as mortgages, credit card debts and unpaid taxes are also relevant and play a critical role in property settlements.

What is property?

Understanding what is considered property in Australian family law is an important starting point.

Family legislation says that property includes assets such as:

• Real estate
• Bank accounts
• Investments
• Business interests
• Cars
• Superannuation
• Jewellery
• Furniture
• Other personal items

But it’s also important to understand that property also consists of debts. Debts can include unsecured liabilities such as:

• Credit card debt
• Personal loans
• Unpaid taxes
• Household bills

Debts can also include secured liabilities such as mortgages and car leases.

In financial settlements, a court will consider any property (including debts), whether acquired before, during or after the relationship. It will decide whether each piece of property forms part of the property pool, based on the circumstances.

Debts are included in the property pool because a settlement aims to achieve complete financial separation, resolving all property issues between you and your ex-partner.

What principles are used to divide a pool of assets in Australian family law?

Australian family law sets out four principles which a court will use to work out how to deal with the property pool. The principles are a starting point. Your unique circumstances will influence a court’s decision about how to divide the property.

The four steps are:

1. Identify all property (including debts) and financial resources of both parties. Value any property as required
2. Consider the financial and non-financial contributions of each party
3. Work out the future needs of both parties, taking into account differences in earning capacity, whether either party has the care or control of a child of the marriage who has not attained the age of 18 years, and any health issues
4. Taking into account all these things, consider what would be a fair division

It’s worth remembering that even after going through these four steps, the court has the power to make any order it considers appropriate.

Once the court has worked out the property pool in step 1, it will deduct the value of the debts from the value of the assets, which gives the net asset figure. Then, the court considers steps two, three and four.

The property pool will include both individual and joint debts.

What happens when a debt is in my name only or my ex-partner’s name only?

 If a debt is in your name only, or in your ex-partner’s name only, it’s known as an individual debt. This type of debt doesn’t necessarily mean that only one of you is responsible for repayment. The court will look at the circumstances to work out who should be responsible.

The general approach is that debts are the responsibility of both you and your ex-partner. This is regardless of whether the debts are in both of your names, or whether they’re individual debts. This approach applies where both you and your ex-partner decided together to take on the debt.

To work this out, a key question for a court is whether the debt benefited both you and your ex-partner.

What happens if my ex-partner went into debt without my knowledge?

Things get more complicated if one of you takes on debt without the other knowing about it.

Again, a court will consider the key elements:

1. Did only one party know about the debt?
2. Did the debt only benefit one party

For example, let’s say that your ex-partner took out a personal loan without your knowledge, spent the money on gambling and lost all of it. You could argue that only your ex-partner should be responsible for that debt because you had no knowledge of it or benefit from it.

These types of arguments must be carefully considered, especially when working out what evidence you need to prove your position. It’s a good idea to get legal advice if you believe you shouldn’t be responsible for a debt.

What happens if my ex-partner takes responsibility for a debt that’s in my name?

Often, larger debts are repaid as part of the sale of assets for property settlement. For example, if your family home is sold, the mortgage and any costs are usually paid off before the remaining sale money is divided.

But sometimes, it’s fair and practical for a joint debt to be moved to an individual debt, or for one individual debt to be taken over by the other party. However, when this happens, a creditor may not recognise that the responsibility for the debt has shifted. If the debt was in both names, the creditor might continue to consider it a debt belonging to both of you until it’s paid off.

Even if you’ve got a written property settlement agreement, it may not be of much use to you if a creditor enforces the debt. However, under Australian family law, you can ask a court to make an order requiring a creditor to change the name on the debt to just one of you, or both of you, or to show that you’re both liable but in different proportions.

This type of order is a critical way to protect your financial security and should be carefully considered if your property settlement is likely to leave either you or your ex-partner in any debt.

What can I do if my ex-partner is recklessly incurring debts or wasting assets?

Wastage is when one party deliberately drains the assets or money that should otherwise form part of the property pool. This type of behaviour sometimes happens after separation but before property settlement.

If you’re concerned that your ex-partner was reckless about going into debt or was wasting assets, you need legal advice immediately.

In these cases, a court can adjust a property settlement in your favour if it finds that your ex-partner has been wasting the assets. We can help you gather the evidence to support your case.

The final word on debts in family law property settlements

In a family law property settlement, it’s as important to identify a debt as it is to identify an asset. Getting an accurate picture of the property pool is the first step in the process of securing a fair property settlement. Along the way, we need to work through other issues, for example, who is responsible for the debt, who will be responsible for it in the future, whether you knew about your ex-partner’s debts, and issues of property wastage.

This article was written by Family Law Associate, Kelly Beck.

We can help you. Contact us to find out more about our services for debts in family law property settlements.

DISCLAIMER: We accept no responsibility for any action taken after reading this article. It is intended as a guide only and is not a substitute for the expert legal advice you can get from marshalls+dent+wilmoth and other relevant experts.