A divorce brings a fresh start, but it can undoubtedly create new challenges. Money and finances are both some of the biggest reasons for relationship tensions, but did you know this doesn’t end after a divorce? If a couple separates with debt, how does debt affect the divorce settlement?
A separation usually means the couple’s assets are divided into what’s known as a property settlement. Depending on the couple’s situation and relationship, this can be a stressful process. However, many don’t think about how debts fall into this equation as well. In this guide, we’ll share everything you need to know about how debt affects divorce settlements.
What Debts Are Included in Property Settlements?
First, what debts are considered as part of the property settlement. While you know couples split assets like vehicles, property, belongings, and so on, what happens to debts that aren’t paid in full at the time of divorce? These are also divided like any other type of property. These debts include:
- Bank loans
- Credit card debt
- Unpaid taxes
- Car loans
- Mortgage debt
- Household bills
A family lawyer helps couples sort through these debts, determining who owes what. This doesn’t have to be a 50/50 split, though it can be in some cases. If the couple is unable to decide how to split their debts, the matter is taken to court for a judge to decide. The settlement includes any property (including debts) that were acquired before, during, or even after the relationship.
Why are debts included in property settlements? This ensures the settlement achieves what’s known as “complete financial separation.” Because all property matters are clarified, you and your ex-partner are prepared to move on without worrying about who owes what and shared property.
How Are Debts Divided in Australian Family Law?
With that in mind, how are these debts divided fairly? As said above, this isn’t necessarily a 50/50 split. There are a lot of factors taken into consideration to make sure this is the best outcome for all parties financially. Your unique situation is always taken into account in family court.
The court considers many things:
- Timeline: When was the debt accrued? Was it before, during, or after the marriage?
- Ownership: Which individual took on the debt in the first place?
- Payments: Who has made the most payments during the relationship?
- Asset pool: The debts are subtracted from existing assets to create an accurate net value.
- Duration: What’s the duration of the relationship?
- Children: If there are any children or dependents, this is also an important factor since families have different future needs.
- Income: Finally, the difference in income is one of the most important factors.
Once the value of the debts is deducted from the value of assets, it’s time to make a decision. The court has the power to make a decision that it feels is appropriate based on the factors above, especially the future financial needs of each partner.
What About Individual Debts?
Another thing to consider is the role of individual debts. What if your debt is in your name only or in your ex-partner’s name only? Is this included in a divorce settlement? In short, this type of debt is called individual debt. However, that doesn’t mean it’s only one partner’s responsibility for repayment.
All debts are the responsibility of both partners, no matter whose name it’s in. Courts ask whether this debt benefited both partners and go from there. In many cases, even individual debts are beneficial to both partners even if only one partner pays for the debt.
Things are less clear if an ex-partner took on debt without your knowledge. This does happen, and it can be intimidating to think you might be responsible for debts you didn’t know about. Again, it comes down to the question of whether this debt benefited both parties. For example, if one partner took on a personal loan for personal purchases you didn’t know about, you likely wouldn’t be responsible for this repayment.
Any large debts (like a mortgage) are typically paid in full as part of the divorce settlement. If you owned a house together, for example, it would be sold to cover the cost of the mortgage. Any profit from the sale is split equally between parties. If you continue carrying debt (like credit card debt), it’s important to note that creditors might not recognise that the responsibility has shifted. You will need to file a court order requiring creditors to change the name on the debt if you no longer want to be held accountable for it.
Final Thoughts on Debt and Divorce Settlement
Ultimately, you have to think of debt as an asset in cases of divorce settlement. It’s something that’s shared between parties depending on a number of factors. When in doubt, it’s a good idea to consult a family lawyer about what you’re responsible for financially during a separation.
Need more help working through a new budget after a life change? The professionals at Debt Busters are here to help. Together, we work with families of all sizes to create long-term goals, plans, and financial strategies. Contact us today on 1300 368 322 for an obligation-free consultation.