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Debt and divorce: issues to consider

By November 11, 2020February 23rd, 2024No Comments

Debt and divorce: With Australian families servicing record levels of household debt, it’s inevitable that separating couples will need to work out how to divide not just their marital assets but also their debt. Here’s a look at issues to consider in relation to debt and divorce so that you can best recover financially from the turmoil of separation.

Debts are dealt with in a property settlement. Parties are required to disclose any debt that they may have, during the discovery phase. The decision as to who is then responsible for paying the debt as part of the property settlement can be formalised in the legally-binding settlement agreement. If parties can’t agree on the terms, the courts can make orders.

In a property matter, the courts generally take a four step approach:

1. Identify and value all assets, debts and superannuation;

2. Consider the contributions of each party to the asset pool;

3. Consider the future needs of each party;

4. Will the proposed property settlement achieve a just and equitable outcome for both parties?

A court will usually take the position that debt accrued during the relationship, whether jointly or individually, was for the mutual benefit of both parties with the mutual consent or knowledge of the other party and therefore the responsibility is shared by both parties. However there may be circumstances where this does not achieve a just and equitable outcome.

What debt might be excluded?

It’s possible to argue that debt that was incurred wastefully by one party, such as through gambling or to facilitate a marital affair, ought not be equally shared between the parties. In cases like this, or other instances of “dissipation of assets”, the debt can be ‘handed’ to the individual who incurred it.

What if the debts were accrued after separation?

Ensure you take note of your official date of separation (such as by sending an email to your ex stating clearly the date on which you were officially separated). Dates can be important later regarding debts to be divided. If your spouse incurred the debt after separation, the court may hold them responsible for it.

With the accrual of debts, the courts look at exactly when debts were incurred. If there was evidence of debts accruing by one party to the detriment of the other, during separation and before divorce proceedings, then the court will take that into account.

Debt incurred post-separation may or may be the responsibility of both parties, depending on whether or not both parties benefited from it during the relationship or post-separation (an example is a tax debt). A court may then potentially include that debt in the marital pool.

No matter when debt was accrued, when deciding how to divide responsibility for the debt, the question is always whether the debt benefited both parties.

What if my ex goes bankrupt?

If your ex files for bankruptcy they may well eliminate their responsibility towards a shared debt, but the debt isn’t magically erased. The creditor is still able to come after any remaining debtor (you).

Debt and divorce can be a confusing issue because there are so many different scenarios to navigate so we definitely recommend that you get financial advice to understand how best to avoid long-term financial impacts of divorce.

The unfortunate truth is that even if one party is made responsible for paying a debt after a divorce, the court usually doesn’t have the power to change the debt terms or contract itself, which is with a third party.

If you are going through a separation and worried about how your joint debt or your spouse’s debt might affect you, please contact Canberra family lawyer Cristina Huesch or one of our other experienced solicitors here at Alliance Family Law on (02) 6223 2400.

Please note our blogs are not legal advice. For information on how to obtain the correct legal advice, please contact Alliance Family Law.

You can find useful money and divorce advice here.


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