What Happens After Separation If The Family Debt is Only In One Name?

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There are many reasons why family debt may be in just one party’s name despite the liability or asset belonging to both parties or only the other party, and when a separation occurs, this can cause animosity, financial stress and confusion about what happens next. Read on to learn how debt is dealt with during a property settlement.

What assets and debts should be considered at separation?

During a property settlement, assets are things like:

  • real estate;
  • cash held in bank accounts;
  • superannuation;
  • motor vehicles;
  • business interests and other investments; and
  • jewellery, furniture and other household/personal items.

Debts are secured and unsecured liabilities including:

  • home loans;
  • car loans;
  • personal loans;
  • credit card debt;
  • tax debt; and
  • any other unpaid bills

During a property settlement, any assets or debts acquired before, during or after the relationship will be considered by the court alongside the circumstances of the matter. Once all assets and debts are identified it will be determined which should form part of the property pool.

The reason that debts can form part of the property pool is to ensure all financial matters are resolved during the settlement so a true separation of the couple can be achieved.

How is a pool of assets divided under Australian family law?

Once it has been determined which debts and assets will form the property pool, the court must decide how to divide them.

There are four key steps taken during a financial settlement to determine how the assets should be split:

  1. Assets and debts are valued and the property pool is determined. The value of the debts are deducted from the value of the assets to provide a net asset figure.
  2. The financial and non-financial contributions made by party are considered.
  3. The future needs of both parties are considered. This includes factoring in the earning capacity of each party, the age of any children of the relationship and other aspects that may affect a party’s financial future, such as health issues.
  4. A fair division of the property pool is determined taking into consideration both contributions and future needs.

If a debt is in the name of one party only, how is it dealt with?

Debt in one party’s name is known as individual debt, however, this does not necessarily mean that the named party is responsible for the whole debt. The court will consider the circumstances to determine who should be responsible for paying the debt. To do this, the court will usually look at who benefitted from the debt to decide who should be responsible for it and generally speaking, debts will become the responsibility of both parties when they form part of the property pool, particularly if it relates to property like the family home.

What happens if the family debt is only in one name?

What happens to the debt will usually depend on the type of debt. For example, a home loan will usually be repaid if the family home is sold, with the proceeds of the sale being divided between the parties.

In some cases, joint debt may be transferred to one party. An example of when this may occur is if the earning capacity of one spouse is far greater than the other and it is fair and equitable for the higher-earning spouse to take responsibility for the debt. One issue with this is when the creditor continues to view both parties as being responsible for the debt until that debt is paid off. This means that the debt continues to burden the other party, even if they are no longer having to make payments towards it.

So, what can be done to solve this issue? Under Australian family law, it is possible to have a court make an order which requires a party to refinance a debt so that it belongs to just one party, both parties equally, or both parties in different proportions.

A creditor may continue to pursue the ‘wrong’ party for the debt – even if a written settlement agreement is provided to them – without a court order, so it is important to seek an order for completion.

My ex-partner had debt I did not know about. What happens now?

As with all debt, the court will consider the circumstances surrounding it. If, for example, during the property settlement you discover that your ex-partner had considerable debt they had accumulated due to a gambling habit, you would need to inform the court that you were unaware of the debt and did not benefit from it. This argument would typically need to be supported by evidence.

What happens if an ex-partner needlessly accumulates debt before the financial settlement?

If you have split from your ex but are yet to reach a financial settlement and they have accumulated new, unnecessary debt, are spending recklessly or have disposed of an asset that would ordinarily form part of the property pool, you should seek legal advice immediately. This type of behaviour is known as ‘wastage’ and where it is found the other party has been engaging in wastage, the property settlement may be adjusted by the court in the favour of the affected party.

If you have separated from your spouse or de facto partner and need assistance and advice to settle your financial affairs, our divorce lawyers can help. Get a free initial consultation to find out how.

At Cairns Divorce Lawyers you will always speak to a Lawyer