Part of the marriage separation process in Australia is, or course, an analysis of what the fair and equitable split of property between the parties should be.

Allowing for reasonable concessions, both parties usually want to maximise how much of the available asset pool they might receive.

But, of course, assets are only one side of the ledger. So what happens in separation with debts that one or both parties might have? Do they get split between the parties? Does each party bear their own debt? What about joint debts?

In this article we’ll discuss the treatment of debts in separation and divorce.

The Fundamentals of Debts in Divorce

As you may recall from our article on the separation process in Australia, one of the major components of separation is the fair and equitable distribution of “property”.

At its absolute core, debts in separation are treated very similarly to assets/property. There are two basic options:

1. The debt stays in the hands of the person who incurred it, and is treated as being that’s person’s debt; or
2. The debt is treated as part of the property pool and jointly allocated (not necessarily equally) between the parties in a similar way to assets.

Where possible, it is preferable that debts are paid as part of the property settlement, so that each party can then go on without historical debt from the relationship.

So, when it comes to the overall property pool, the Court will look at all of the joint and separate:

1. assets and property; and
2. debts and liabilities,

and apply principles of fairness and equity to come up with what it considers to be a just outcome after the separation is finalised.

The parties will each have been required to make full and frank financial disclosure by the time this exercise is done, so the overall position is usually well known. With that disclosure done, the parties (or usually their family lawyers) will produce a complete list of the assets and liabilities.

At that point, the question becomes whether the Court should simply leave things as they are, or make adjustments to assets, liabilities or both to arrive at a post-separation position.

So in theory, if:

1. Bruce has $50k in individual assets and $20k in individual debt;
2. Yolanda has $50k in individual assets and $20k in individual debt; and
3. there are no joint assets or debt,

the Court could potentially just leave things as they are if there was no particular reason to change the status quo.

In practice though the situation is almost always more complicated, and some adjustments are made.

So let’s now turn to a few specific situations that can arise when considering how debts are treated in divorce or separation.

Were the Debts Incurred for the Benefit of the Relationship?

One of the relevant factors in deciding how to treat a debt during separation is whether or not the debt was incurred for the benefit of the relationship generally.

Whether or not the debt is individual or joint, the Court will usually begin with an assumption that the debt was incurred for the benefit of the relationship (ie – both parties) and treat it accordingly. As a result, the starting point would be often that the debt should be part of the “pool” of liabilities to be discharged using the assets of the relationship.

That said, this is not always the case.

So, for example, a normal credit card debt balance might be considered as part of the joint liabilities of the parties if it relates largely to day-to-day household expenses. That debt would quite likely be treated as part of the overall property pool, and not necessarily weighted to one party or the other.

But what if the credit card debt relates to your ex’s gambling habit? If you can put on evidence that the debt relates solely to the actions or responsibilities of your ex, then the Court might be prepared to make it “their” debt in the final outcome, and exclude it from the pool.

What other Liabilities Might be Excluded?

Other than our gambling example above, what other kinds of debt might the Court exclude from the combined property pool?

The big picture question is whether the debt was incurred by one spouse only for their own purposes. That might take a few different forms, for example:

1. irresponsible or wasteful spending (such as our gambling example, or buying illicit drugs);
2. deliberate attempts to reduce the property pool to the detriment of the other party (lavish and costly personal trips taken just before financial disclosure);
3. clearly reckless actions that increase liabilities or reduce assets (giving away major assets to other people).

In cases where the Court is satisfied something like this has occurred, it could treat the debts or wastage in a way where only the party who engaged in the behaviour bears the cost.

What About Larger Debts like Mortgages after Separation?

While it’s ideal for debts to be paid out of the property pool in the separation, that’s not always possible.

The obvious and most common example is a large mortgage debt where both parties are borrowers for a jointly owned house.

There are a few options:

1. The debt stays as it is with both parties responsible for payments. This is not ideal, given it keeps you and your ex’s financial interests intertwined following separation. There would need to be fairly good reasons why you might pursue this option (for example the availability of housing for children);
2. The house is sold, the mortgage paid off, and the available proceeds distributed to the parties with the rest of the property pool;
3. One party refinances so that they are the sole owner/borrower, essentially taking over both the mortgage debt and the associated asset of the house.

In our third example, if one party is going to take on a large liability but also get the benefit of the associated asset, then the Court needs to consider the overall impact of that on the distribution of the property in the relationship. That process is a bit beyond this article, but the point here is that it is possible for large debts to continue through the end of the relationship in a variety of different ways.

What about Debts Incurred after you Separated?

Often a bit of time passes between your relationship ending and the distribution of the asset pool.

During that time, one or both or you might incur further debt that then exists at the time the Court is considering the appropriate distribution of the property pool.

So how are those debts treated?

The answer to that will depend on the nature of the debt. The fact that it was incurred after you separated is relevant, but less important than the reason it was incurred. A debt that is completely personal and entirely unrelated to the relationship is more likely to be treated as “yours” alone.

So, for example, if a party incurs debt to send a child of the relationship to an agreed school, that could potentially be treated as a debt that should form part of the asset pool.

Similarly, if a party was unable to provide for themselves and is forced to go into debt to cover basic living expenses while waiting for the separation process to be finalised, that could well be treated as part of the property pool.

However, purely personal debt in that time for the sole benefit of the person who incurred it could be left in their hands to deal with.

Worried about What Happens to your Debt After Separation?

What happens to debts after separation can make a significant difference to the outcome of a property settlement.

Absent an agreement with your ex, for the Court to reach a fair and equitable outcome it’s important that you have compelling evidence and submissions to support your position.

That, of course, is why it is important to engage family lawyers to help you through the separation process, to ensure your interests are protected and a fair outcome is reached. Get in touch today if you need help with your circumstances.