How is debt split in divorce
A divorce can be a challenging time in a person’s life. Add debts in divorce and trying to figure out how is debt split in divorce and you’re in for a real-life nightmare.
When a separation and subsequent divorce takes place, the couple’s assets are divided in a property settlement.
That is a necessary but not always harmonious process.
Like assets, the debt accrued during the couple’s union is also divided.
Debts that are assessed during property settlement include:
- Bank loans
- Mortgage debts
- Credit card debts
- Car loans
The division of assets doesn’t necessarily have to be 50/50 during a divorce and shouldn’t be assumed to be.
Property settlements are usually made on a case-by-case basis and no two cases are identical.
A property settlement is usually a four step process that your lawyers meticulously carry out to ensure your financial needs for the future are met.
You can read our article on property settlement to learn more.
Things to consider when splitting debt in divorce
The debt split in divorce is done during property settlement between the two separating parties. Some questions that influence how debt is divided include:
- When was the debt accrued (before, during or after the relationship)?
- Which party accumulated the debt?
- Which party was paying the debt off during the relationship?
- How much debt was accumulated and how does it affect the overall asset pool?
- Is there an asset attached to the debt?
Other factors that will influence legal proceedings determining how debt will be divided during divorce include:
- The duration of the relationship (marriage or De Facto)
- Financial contributions made during the partnership
- Domestic (and other) contributions made during the marriage
- If there are any children or dependents
- Differences in income between the two parties
When determining how is debt split in a divorce, the court will take into account who accumulated the debt, the names the debt is in and the purpose of the debt. All of these things will be considered, however just because a debt is in one persons name, it does not mean that it will remain with that person after divorce.
Let’s clarify how is debt is split in divorce with some examples.
Example 1 – How is debt split in divorce
Let’s say Jack and Jill got married in 2015 and are filing for divorce in 2021.
They have two children. Prior to the marriage, Jack took out a loan in 2014 to finance the wedding, the honeymoon and what later became the family car.
If those loans are still being paid during the divorce proceedings, it is likely that Jill will have to assist as the loans were taken out for purposes involving them both.
If Jack also took out a loan to buy a cafe in 2009 and the cafe went bust in 2011 before meeting Jill, Jill will be less likely to contribute to paying off its loan.
On the other hand, if the cafe was still in business during the relationship and money from the business was used in the relationship, then it will be likely considered a joint debt.
Jack bought a property in Brownsville under his own name and got a mortgage under his own name.
Jill moved in with Jack 3 years after Jack bought the property.
Jack and Jill get married and live in the property for 5 years. They then move out, keep the property and use it as an investment property.
They get divorced after 10 years.
In this example, the mortgage remains under Jack’s sole name.
As the property is likely to form part of the asset pool to be split between the parties, the debt will also form part of the asset pool.
It is not relevant that the debt is in Jack’s sole name. They are both receiving the benefit of the asset, so should both share in the debt.
Jack and Jill were married for 15 years and separated 2 years ago.
1 year ago, Jill got a credit card and racked up a credit card debt of $15,000 going on a holiday.
The debt is in Jill’s name and was post-separation. This debt will remain with Jill and will not form part of the property pool.
What happens to a mortgage during divorce
If a couple has a mortgage on a home they purchased together during their marriage, one party will usually buy the other party out should a divorce take place.
This means that one party will end up with sole ownership of the property, along with the mortgage.
Fortunately, you will not have to pay stamp duty to transfer your share of the property to your partner.
What is wastage in family law
A wastage argument in family law is an argument that one party has wasted part of the asset pool and therefore, should be solely responsible for the debt incurred for that waste.
This is often argued when a person has a gambling problem or if they are a big spender.
When there is a debt split in divorce, one party will try and ensure that they do not end up with the other party’s debts.
Unfortunately, if one partner has acquired debts because of problem gambling during the relationship, it is unlikely that the court will add the debt of the value back into the asset pool.
However, the court may consider that one spouse has been wasteful of the asset pool, and might thus award the non-gambling partner a larger portion of the asset pool.
Furthermore, if an individual incurs gambling debt post-separation and before divorce, the court might consider this behaviour as ‘wastage’ and add the value of the debt back into the asset pool. Wastage also includes debt incurred by a failed business or allowing unrelated parties to access and spend from the asset pool.
Final thoughts on a debt split in divorce
When you find yourself in a challenging position and thinking about things like how is debt split in divorce, consult with a lawyer to assess your rights and a strategy to protect yourself and your assets.
Some action steps you can start with to protect yourself include:
- Ensuring you have a bank account solely in your name that you can access
- Retaining any of your personal items that you’re concerned your ex might claim
Property settlement doesn’t need to take place in a courtroom.
In fact, good family lawyers are keen to complete property settlements outside court.
If you and your former partner’s lawyers are unable to come to an agreement, a court will determine how the assets – including debts – should be divided.
If you do reach an agreement with your former partner and the court finds that the outcome of the property settlement is inequitable, a court may not make those orders. Furthermore, if you’re unsatisfied with the outcome, you can apply for financial orders with the court.
As mentioned previously, each case is different and property settlement can vary vastly from one couple to the next. Your specific case may be different to the examples highlighted in this article, so it’s likely a property settlement will have different results. Consult with one of our lawyers if you’d like to learn more about property settlements and what you’d be entitled to.
Principal of Justice Family Lawyers, Hayder specialises in complex parenting and property family law matters. He is based in Sydney and holds a Bachelor of Law and Bachelor of Communications from UTS.