What happens with loans after divorce?

After a divorce, loans are usually divided equally between both parties.

Loans that the couple or individuals owe are understood as negative contributions to the asset pool. That is, they will be deducted from the value of other assets in the pool.

Generally – though not always – courts assume that any debts or loans incurred were for the mutual benefit of the relationship and hence, the responsibility of the loan will normally be split between both parties equally. 

The stress of divorce is only furthered when financial questions arise. This includes not only the split of assets but also of liabilities, such as loans. This process of dividing property is called a property settlement, and this process can commence once a couple has separated.

How property is dealt with in a property settlement: 

Data has shown that the average Australian household has debt of $250,000 and hence considering how loans are dealt with after divorce is a common question. It is especially pertinent if you are a relatively young couple with children and a large mortgage. 

The process of splitting property owned by two parties after they end a relationship is called a property settlement. The goal of property settlement is for both parties to have financial means by which they are able to support themselves and meet any financial responsibilities in the future. Hence, this requires that there be a just and equitable split of assets and liabilities. 

A property settlement can occur with or without the Court’s help, and this will depend on the circumstances of the parties. Whilst an early property settlement that occurs during or before the relationship starts is recommended, most parties normally deal with the issue once they are beginning to separate. 

It is important to note that the term ‘property’ refers to both assets and liabilities that the parties own. Hence, in splitting property between two parties, some liabilities that may be considered include: 

• Credit card debts 
• Personal loans
• Household bills
• Taxes 

Debts considered can also include secured liabilities such as car leases and mortgages. 

In determining the just and equitable division of property for both parties, the Court will consider whether such property was incurred before, during, or after the relationship. This is relevant to ascertaining the relevant asset pool to be split between the parties. Once the asset pool has been determined, the relevant debts will be deducted. This will include both individual and joint debts. 

Individual and join debts

An individual debt is a debt that only is in one party’s name. However, this does not mean that only one party is responsible for repayment. To determine who is responsible, the Court will look at several different factors of the relationship. 

Generally, Courts will approach debts by assuming that the responsibility of them lies on both parties. This is because of the assumption that loans are taken for the benefit of both parties. However, this does not necessarily mean that all individual loans that your ex partner has taken on will be yours also to bear. 

What if the loan is only for one party’s benefit? 

The Court will assess who has derived benefit from the taking of the loan. The determination of this question will help to determine who is liable for the loans. Another consideration is whether both parties knew about the loan. If only one party knew about the loan it will be more likely to be decided that only the individual who knew is responsible. 

Whilst legally a court may determine that an individual loan is the shared debt of one party, or that a shared debt is the responsibility of only one party, creditors may not recognise that such responsibility for the debt has shifted. Hence, once the responsibility has shifted, it is important that you consider obtaining an order from a Court that requires the creditor to change the name on the debt or loan.  

This type of order is important in protecting your financial security and ensuring that the property settlement is able to achieve its aims in splitting up liabilities fairly between the parties. Ideally, the conclusion of the property settlement will see that all outstanding joint debts will be repaid or refinanced in the name of only one party. 

If you need any assistance regarding issues of property settlement after a relationship breakdown, feel free to reach us via the contact form.