Most couples accept that they need to divide their property following the breakdown of their relationship. But what about their debts? Do they have to divide these too?
Many people don’t consider the division of debt fair or necessary: Why should I have to pay his or her debts, when I knew little or nothing about them and they were all his or her fault? Why should these debts be imposed on me as a result of my marriage or relationship?
Do these spouses have a point?
The answer is, it depends. Generally, total debts are deducted from total assets to form the net asset pool to be divided. But there are exceptions.
It all depends on the circumstances. Parties usually have little success in avoiding responsibility for debts they knew about and incurred as a result of a joint enterprise.
This was made clear by the Family Court in one case where the wife insisted the husband bear the losses for his failed business. The court told her she had participated in the business and if the business had succeeded, she would have expected her fair share of its success and would have been entitled to it. So she can’t now avoid the consequences of the business failure.
The nature of marriage and marriage-like relationships means that couples have to take the good with the bad. Parties are usually not punished for failed entrepreneurial activity or unwise investments if they act in reasonably good faith.
However, from early days of the Family Court, there have been exceptions.
Exceptions to avoid sexually acquired debt
- One main exception is debts that were clearly the fault of one party. This is often referred to as a “wastage” argument. Where a debt was incurred as a result of negligence, recklessness or even by a deliberate act of one party, whose actions dissipate the asset pool and unfairly reduce the other party’s entitlements and expectations; such debts can be attributed to one party and not shared.
- Frequent problems arise as to whether so-called parental loans from the bank-of-mum-and-dad should be repaid to the parents following a separation. It often seems to one party that the other party’s parents are only claiming there is a debt owing to them, because of the separation and to benefit their own child. As to whether such loans are respected often depends on the state of documentation.
- If the loan is secured by a mortgage on real estate it almost always has to be repaid. The status of an unsecured parental loan is less certain, particularly if there is no documentation. The courts do retain a discretion to disregard or discount parental loans, particularly where the courts consider the parents would not require repayment from their own child and the justice of the case requires it.
- Debts can be disregarded if they are vague and uncertain; such as a potential tax debt or court action. Also, where the debt was incurred as result of dishonesty or illegality; such as relating to drug deals or tax evasion. Gambling debts are commonly disregarded. Also, debts incurred after separation. Or where one party is exploited by being told to sign here, and then find they have a large loan account in a trust controlled by the wealthy parents.
So whilst debts are usually deducted from the asset pool, prior to dividing assets between the parties, there are a variety of circumstances that the court will carefully consider based on what is fair.
There is a lot of scope and potential for arguing that certain debts should be treated in a different way, particularly where it creates an injustice for one of the parties or the children.
*Andrew Corish is an Accredited Specialist in Family Law with Corish & Co Specialist Family Lawyers North Sydney. He is trained in Family Dispute Resolution.