Debt and the End of a Relationship: Everything You Need to Know
Ending a relationship is such an incredibly challenging process to go through, both financially and emotionally. Add debts to the mix and the process can be even more complicated and stressful.
If you find yourself in a situation where you’ve ended your relationship and are separating, being informed as to what constitutes a “loan, liability or debt” for family law purposes is important so you obtain your correct and fair entitlements in a property division after separation. Here’s a guide on how debts are treated you’re your relationship or marriage ends and what you can do to protect yourself in the process.
Marital or joint debt refers to any debt that was incurred by either spouse during the relationship. This can include various types of debt, such as:
- credit card debt
- mortgage loans
- car loans
- personal loans
- student loans
- business loans
- taxation liabilities
- other financial obligations
During divorce and separation proceedings, the division of debt is often an important aspect of the overall property settlement. The court aims to ensure a just and equitable division of both assets and debts between the separating spouses.
However, the specific rules and guidelines for debt division may vary depending on the jurisdiction and the individual circumstances of the case.
Each spouse is generally responsible for their separate debts incurred before the marriage or relationship, assuming the debt is incurred in their own name. This does not however mean that the debt is excluded from the balance sheet.
When it comes to debts accumulated during the relationship or marriage both spouses are typically considered equally responsible in the eyes of the law. Regardless of which spouse incurred the debt, who benefited from the debt, or whether the debts were accumulated individually or jointly. The debt ordinarily would appear on the balance sheet and treated as though it was incurred by both parties.
However, if there is evidence of “waste” for example where actions have been taken by a spouse to intentionally reduce the value of assets or increase liabilities, then that spouse can be held responsible for the resulting debt.
Examples of waste could include:
- incurring gambling debts or losses;
- alcohol or drug addiction; and
- or selling an asset from the shared pool and spending the money without justification.
Keep in mind that only actions that are deemed excessive or reckless will be treated as wastage and that reasonable expenses are not considered wasteful behaviour by the Court.
In many cases, couples are responsible for splitting the debt accumulated during the relationship as part of the separation process. The division of debt can be approached in a couple of ways:
In an amicable divorce/separation where both parties can agree, they have the option to negotiate and determine how to divide the debt. This may involve assigning specific debts to each spouse or agreeing to pay off certain debts jointly.
Negotiation and Mediation
If you’re unable to come to an agreement, you can try to resolve your dispute by engaging in negotiation and/or mediation. Legal professionals, like family lawyers, can help you in these processes to devise a strategy and desired outcome and advocate for you to achieve this.
If the spouses are unable to reach an agreement on the division of debt, the Court will make the decision based on factors such as the financial circumstances of each spouse, their ability to repay the debt, and the overall division of assets and liabilities.
The division of debt can vary depending on the specific circumstances of the case. When making that decision, the court will consider various factors:
- the financial situation of each spouse
- their earning capacity
- contributions to the marriage
- and other relevant factors
Protecting yourself from your partner’s debt can be a concern during the separation or even while you’re still in the relationship. While specific strategies may vary depending on your individual circumstances, below are a few general steps you can take.
Consider entering into a legally binding financial agreement with your partner, either before marriage (prenuptial agreement) or during the marriage (postnuptial agreement). These agreements can outline how debts and assets will be divided in the event of a divorce or relationship breakdown, providing clarity and protection for both parties.
Maintain separate bank accounts and credit cards instead of joint accounts. By keeping your finances separate, you can reduce the risk of being held liable for your partner’s debts. However, this may not completely protect you if debts were incurred jointly. These debts may still be taken into account in assessing the overall outcome of a property settlement.
Keep a record of your financial transactions and debts to establish your own separate financial identity. Regularly monitor your credit reports to ensure there are no unknown or unauthorised debts in your name.
Be cautious about taking on joint debts, co-signing or guaranteeing loans with your partner. Understand the potential risks and implications before agreeing to be responsible for someone else’s debt.
Consult with a lawyer to understand the law and your obligations before signing any legal document. We can guide you on how to protect yourself and navigate the complexities of debt division in the unfortunate event of separation.
Managing your debts can be incredibly challenging, especially during a separation. If you choose to work with us during this difficult time here’s what you can expect from us:
- We’ll provide legal advice, explain your rights and obligations regarding asset and debt division.
- We will assess all the assets and debts involved in your marital property pool, including properties, bank accounts, investments, and outstanding debts.
- We will assist you in negotiating with your spouse to reach a fair settlement. If needed, we can represent you in court proceedings, prepare your case and advocate for a fair division of assets and debts.
- We will help you with the preparation of legal documents, such as financial statements and settlement agreements, accurately reflecting your agreed-upon terms.
- After the division is finalised, we will guide you through ensuring compliance with Court orders or agreements, and if necessary, help you enforce the orders.
Throughout the process, we will provide personalised advice, support, and representation, ensuring that your best interests are protected.
Speak with a family lawyer today.