How do Debts Affect a Property Settlement?

In divorce settlements, the focus is often on the assets of the marriage and how these are to be split between the parties. However, it is not just assets that form part of the property pool – debts are also factored in. In fact, debts are essential in ascertaining the net worth of the property that is available to be distributed between the parties. As a matter of financial security, it is important for the parties to be aware of how their individual and shared financial obligations may be split. This article provides a run-down of what can often be a complex part of the property settlement process. 

Debts are property 

As mentioned in our article on overseas assets in property settlements, the Family Court follows a set of steps in determining financial disputes in divorce proceedings. These steps are:  

1. Identifying the pool of property available for division 
2. Assessing the parties’ (financial and non-financial) contributions to that pool
3. Determining the future needs of each party
4. Dividing the property between the parties accordingly

The law treats debts as property

At the first stage (identification of property), the court identifies all pieces of property belonging to the parties. Property, in this context, refers to both assets and liabilities (including debts such as personal loans, mortgages, credit card debts, unpaid bills and car leases). That is, the law treats debts as property. In turn, the court will take account of the parties’ debts in assessing the value of the property pool. This is done by deducting the total value of the parties’ debts from the total value of their assets, to calculate the net value of the property pool. In the final division of property, the parties come away with their share of both assets and debts. 

See our article here on how a Mortgage can be managed after Separation.

How are debts split?  

As with assets, the division of debts between the parties will not necessarily be a 50-50 split. Many factors inform the court’s decision as to who bears what in terms of liabilities. For instance, the following circumstances often play a role in how debts are split between ex-spouses: 

• Whether the debt was incurred by one party or by both (jointly);
• Whether one or both parties benefited from the debt (e.g. where there is an asset attached to the debt);
• Whether the debt forms part of a pattern of wastage by one party (deliberately or recklessly draining assets or money that would otherwise form part of the property pool);
• When the debt was incurred (pre-relationship, pre-separation, or post-separation); 
• Who was paying off the debt during the marriage; 
• The income of each party respectively; 
• The duration of the relationship; 
• Whether the debt was hidden or concealed by one party from the other. 

Essentially, the way in which debts are split in property settlements depends on when, how, for what purpose, for whose benefit, and by whom the various debts were incurred. It tends to turn on the specific facts of each case. The headings below explain the court’s approach towards different types of debts. 

Individual versus joint debts 

As a general rule, the debts of a divorcing couple are a shared responsibility, irrespective of whether they are in one or both of the ex-spouses’ names. This is based on the assumption that the relationship (and as such both parties) gained from the incurrence of the debt. However, there are certain debts which the court will properly regard as individual or personal, and therefore only to be borne by the party who originally incurred and/or benefited from them. 

One example is a loan taken out by one partner to fund a private business venture, where none of money was made available to or accessed by the other partner, or expended for any purpose in connection with their relationship. Another example would be a HECS debt incurred by one spouse – unless, for example, it was agreed between the parties to the marriage that that spouse would study, gain qualifications, enter the workforce, and ultimately assume the role of main income earner in the family. 

On the other hand, a mortgage (whether registered in one or both of the parties’ names) will be regarded as a joint debt and part of the property pool. This is on the basis that, the parties having lived together in the house over which the mortgage was granted for the duration of their relationship, both ex-spouse enjoyed the benefit of the asset and so should share the burden of the corresponding debt. 

Debts incurred pre-relationship or post-separation

A debt incurred by one spouse prior to the relationship for purposes having nothing to do with and not in fact used to fund anything related to the marriage (such as a family holiday or the purchase of a motor vehicle driven by both spouses) will be unlikely to be included in the property pool. Similarly, a debt incurred by one party in the wake of separation in connection with reasonable living expenses will be treated as a personal liability only. 

Wastage

During the relationship or after its breakdown, one spouse may unreasonably expend and/or deplete assets of the relationship – for instance, by making reckless investments or engaging in problem gambling. This is referred to as wastage. Where there is evidence of wastage, the court may make adjustments in the property settlement in favour of the other party in order that he/she/they not be left to suffer under the weight of those debts. 

Key takeaways 

• In property settlements, debts (like assets) are split between the parties. 
• How debts are divided between ex-spouses depends on when, how, for what purpose, for whose benefit, and by whom the debts were acquired.
• The court will look to all the circumstances to determine whether the value of a particular debt ought to be added back into the property pool, or regarded as merely a personal liability incurred by one of the parties individually. 

To learn more about your entitlement to assets versus your responsibility for debts in the relationship as part of your divorce settlement, contact us via the form on this page – our team of family law experts is here to assist.