When a couple divorces in Australia, they should also separate their finances through a property settlement. While the concept of a property settlement immediately suggests the division of assets, it is important to note that this process also includes the separation of debt (such as mortgages, credit cards, and business loans). How the liability for a particular debt is shared in a property settlement depends on a variety of factors, including the type of debt, the contributions of each spouse to the debt, any assets secured against the debt, and family law principles of equity and fairness. This page outlines how debts are shared in a divorce in Australia.
Property settlements
In an ideal scenario, a separating couple will privately negotiate a division of their assets and debts without recourse to a court proceeding. Even then, this private agreement should be approved by the Federal Circuit and Family Court of Australia (“the court”) through a Consent Order to ensure that the property division is fair, equitable, and enforceable.
When former spouses cannot reach a private agreement about a property settlement, they need to submit to the court for a decision. The rules surrounding the division of assets and debts in a property settlement are established in the Family Law Act 1975 (Cth) (and the Family Court Act 1997 (WA) for de facto couples before the Family Court of Western Australia). Under this legislation, both parties in a property settlement are required to make full and frank financial disclosure of their assets and liabilities so that the overall financial position of the former couple is clear. The parties (usually through their family lawyers) will work together to agree a complete list of the assets and liabilities that constitute the “property pool”. All joint and individual assets (including superannuation funds) are pooled together, and then individual and jointly held debts are subtracted from that asset pool. This pool is typically recorded in a spreadsheet.
The court may decide to leave the financial position recorded in the property pool “as is” if there is no reason to change the status quo. More commonly, it is necessary to order changes to the way assets and debts are held to reach a fair division. In deciding what orders to make, the court considers the contributions of each party to obtaining and maintaining assets, both at the outset and throughout the relationship. Importantly, the court recognises non-financial contributions, such as undertaking childcare and household responsibilities, as equal to financial contributions. The court also gives considerable thought to each party’s future financial needs and their ability to support themselves when dividing assets.
Debts in the property pool
During a property settlement negotiation, debts are categorised into two main types: joint and individual debts. As the names suggest, only one spouse is responsible for individual debts, whereas joint debts are incurred together. However, both individual and joint debts incurred during the relationship are added to the property pool.
Ideally, all joint debts will be discharged as part of the process of compiling the property pool, but this is not always possible or practicable. The court can order that an individual debt stays in the hands of the party who is currently liable for it, or order that one party becomes liable for a joint debt. Conversely, the court may order that assets be sold to discharge particular debts to free the couple from joint liability.
Some debts incurred during the relationship will be excluded from the joint property pool. A key consideration when assessing debt is determining whether the debt was incurred for the benefit of both parties during the relationship. For instance, a credit card debt in one spouse’s name might be considered a shared liability if it was used to pay for household expenses. Alternatively, if the credit card debt was incurred because of one spouse’s gambling habit, then it is more likely to be excluded from the pool.
There are other kinds of debts that the court might exclude from the combined property pool, largely based on whether the debt was incurred by one spouse for their own purposes. Excluded liabilities might include:
- wasteful or irresponsible spending (involving substance abuse, gambling, shopping habits);
- deliberate attempts to reduce the asset pool before financial disclosure to the detriment of the other spouse; and
- reckless action that reduces assets or increases liabilities, such as giving away property to third parties.
In these cases, when the court is satisfied that one party has been irresponsible in incurring the debt, the individual is likely to retain liability for the debt without it being deducted from the common property pool.
Continuing joint debts
As noted above, the best-case scenario is for all joint debts to be paid out of the property pool following separation, but that is not always possible for larger joint debts such as mortgages. In the case of a mortgage, there are a few options:
- The debt remains with both parties continuing to be responsible for repayment. This is obviously not ideal as it keeps the former couple’s finances intertwined after separation. However, this may be a practical solution when the debt is for a home where minor children reside;
- The property is sold, the mortgage discharged, and any proceeds directed into the property pool; or
- One party refinances in order to take over as sole owner of the property, assuming the entire mortgage debt. In that case, the court needs to assess the overall impact this will have on the distribution of other assets and debts.
Debts incurred after separation
One or both of the parties might incur further debts during the period between the end of a relationship and the finalisation of the property settlement. It might be surprising to learn that even debts incurred during this time can be considered a shared responsibility. The timing of the debt is less important than whether the debt in some way benefited both parties. For instance, while a personal debt is likely to be treated as that party’s responsibility, a debt incurred for standard school fees of a shared child would probably form part of the asset pool. Similarly, if either party is forced to take on debt to cover basic expenses while waiting for the finalised property settlement, that too may be treated as part of the shared asset and liability pool. This is one of many reasons that a former couple should strive to finalise a property settlement in a timely fashion.
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As the average household debt in Australia is over a quarter of a million dollars, the allocation of debt after separation can make a significant impact on the outcome of a property settlement. It is essential to present a compelling submission to support your position and engage excellent representation to protect your interests. At Taylor Rose, we can provide the legal advice that you need during this crucial process. Please contact Taylor Rose on 1800 491 469 for any legal assistance.
