Following a divorce or de facto separation, couples are typically eager to claim their share of the asset pool and assert financial independence. The story, however, is a little different when it comes to dividing debt. With the average Aussie household having a quarter of a million dollars in debt, understanding your financial responsibility following separation is crucial to move forward with the next chapter of your life.
The asset pool isn’t just assets
The total asset pool of a couple not only includes property, savings, cars, shares and other household items, but also personal loans, business loans, mortgages and credit card debt. Most importantly, it’s not just joint debt that contributes to the total asset pool. Depending on the circumstances, individual debt may be the burden of both parties, too.
What is joint debt and what is individual debt?
One of the most common types of debt in a divorce or separation is joint debt. Joint debt refers to any debts that were incurred together during the relationship, such as a mortgage, car loan, shared credit card debt or household bills. Another type of debt that may arise during a divorce or separation is individual debt. This refers to any debts that were incurred by one party alone, such as a personal loan, credit card debt, student loans or unpaid taxes.
How will the court decide the responsibility of individual debt?
Typically, a court will assert that both joint and individual debt accrued during a relationship were of the mutual benefit for both parties and were done so with mutual knowledge or consent. As such, they are generally deemed a shared responsibility to repay following divorce or de facto separation, regardless of whether the debt is in one or both party’s names.
As with all legal matters, however, there can be exceptions to this general rule. Two key questions asked by the court help to determine whether individual debt will be the responsibility of both parties moving forward are:
1. Did only one party benefit from the debt?
2. Did only one party know about the debt?
Through these considerations, the court may decide that one party has acted negligently and has therefore reduced the total asset value and incurred reckless debt. Actions that may result in negligent debt include alcohol abuse or drug addiction, gambling, selling an asset from the asset pool and then spending the money raised, letting other people use assets for free, or going on an extravagant shopping spree.
For example, one party may have taken out a personal loan without the knowledge of the other and wasted all the acquired money through gambling. The court may view this debt as the responsibility of only one party as only one party benefited from the debt and only one party knew about the debt. As such, the party responsible for this debt will have it added back to their side of the asset pool as a deduction and the innocent party will not be responsible for its repayment at all.
Contrary to this, the court may determine the student loan of one party is a shared responsibility as this helped to secure an income that supported and was of benefit to both parties throughout the relationship.
Do we have to go to court?
Reaching a property settlement agreement outside of court is the favourable option as its often quicker and cheaper. However, this should always be done with an experienced family lawyer on your side to ensure you receive your full entitlement and aren’t held responsible for any negligent debt from the other party. A lawyer will also be able to prepare the legal documentation to ensure the agreement is final and cannot be altered in the future.
In some cases, and for an array of reasons, reaching an amicable agreement may not be possible for some separated couples. This means that the matter will be dealt with by the court. Legal costs associated with the proceedings are the individual responsibility of each party.
How can Waters Lawyers help?
Although the information provided in this blog can form a strong foundation of knowledge, every divorce or de facto separation matter comes with its own complexities. At Waters Lawyers, we are highly experienced in negotiations and achieving a property settlement that is fair, just and, most importantly, will allow you financial freedom for the next chapter of your life.
