Informal Property Settlements
Updated: 30 September 2024 · Read time: 5 minutes
An informal property settlement refers to an agreement reached between separating or divorcing couples regarding the division of their assets and liabilities without involving lawyers or the court.
As the term “informal” implies, such an agreement could be made verbally, by emails, written on paper, or by just by maintaining a status quo that is understood to imply agreement.
A “formal” property settlement is documented via a binding financial agreement, consent orders, or court orders.
The perceived “advantages” of an informal property settlement
There are - at first - understandable reasons that people want to rely on an informal property settlement.
These include:
- Not realising the need for it in the emotional maelstrom following separation,
- The cost of using lawyers,
- Avoiding conflict with their partner by having to negotiate terms,
- People who are highly agreeable by nature, and follow their partner who doesn’t want a ‘formal’ property settlement,
- People fixating on parenting arrangements following separation without considering what to do with property.
What are the risks with an informal property settlement?
Firstly, we would never recommend anyone use an informal property settlement. Let’s run through some of the risks and disadvantages that it can bring.
Critically, informal agreements are not enforceable. If the other party fails to adhere to the agreement, and if the agreement hasn't been properly documented, it is not binding or enforceable.
If the couple divide their finances and consider the matter to be resolved, either party retains the right to later apply to the court for further adjustments, irrespective of what they've already received or given.
And if they do raise the matter in the future, then any additional assets, liabilities, or superannuation accumulated by either party after an informal settlement will be considered part of the asset pool. For example, a house purchased following an informal property settlement could later be counted as part of the asset pool to be divided.
In situations where parties had a joint liability (eg joint mortgage, credit card debts, loans) and one party fails to uphold their obligations, creditors may pursue the other party to fulfil the outstanding obligations.
The lack of formal documentation for an agreement may lead to unintended consequences for a party's estate, adversely affecting their beneficiaries.
If one partner enters a new relationship and the couple jointly acquires new assets, then that new asset could become part of the asset pool to be further adjusted.
Dividing Superannuation
Splitting superannuation can only be done through showing that the property settlement was conducted via the means mandated in Australian law (ie Financial Agreement, consent orders, court order).
Stamp Duty when selling or transferring property
In cases involving the sale or transfer of property, stamp duty can only be circumvented by formal agreement.
Running out of time
Some people rely on legal time limits, after which they expect to be exempt from their ex-partner being able to make any further claims for a property settlement.
Those time limits are:
- 12 months from the date of divorce
- 24 months from separation for defacto couples.
While these time limits may provide some limited protection, it's crucial to note that even after their expiry, a party can still request that the Court allows them to proceed out of time.
Consequently, parties should not solely rely on the expiration of these time limits.
Are Informal Property Settlements Binding?
Working out the exact terms of an informal agreements can be challenging.
Even if an informal agreement is documented, there's no legislative mandate for the court to enforce its terms. While the court may consider the parties' intentions, informal agreements are typically not deemed binding.
According to the Family Court Rules, agreements regarding property distribution should be formalised through either Consent Orders or a Binding Financial Agreement that adheres to the Family Law Act's requirements. Any other agreement is unlikely to be recognised as binding.
Frequently, courts are faced with the question of whether unformalised property settlement agreements can justify dismissing property adjustment applications. However, past rulings have repeatedly shown that informal agreements can be set aside, leading to significant legal expenses and additional adjustments for the other party.
What happens when an informal property settlement is invalidated?
If your informal property settlement is invalidated, it becomes necessary to restart the property settlement process afresh.
This entails both parties providing comprehensive and honest financial disclosures of their current financial standings and determining each party's entitlement.
Depending on the duration of separation and the complexity of financial affairs, this can be a costly and challenging endeavour.
Your present circumstances are considered when assessing your probable entitlement to the asset pool.
Consequently, what you or your ex-partner were entitled to at the time of separation may differ significantly from your current entitlement. Any assets or liabilities acquired after separation from your former partner are likely to be factored into your asset pool.
Assets are evaluated at their current value, not the value at the time of separation.
Conclusion - so what’s the alternative?
If you and your partner agree on how you want to formalise the terms of your settlement, then Consent Orders or a Binding Financial Agreement are an easy way to formalise your agreement.
The costs of engaging a lawyer who specialises in property settlements is quite cost effective when considering the risks you are avoiding in the future.
Feel free to get in touch with us to discuss your property settlement.
