What happens to your debt when you separate?

After a couple separates, generally (if they have been in a relationship for at least three years) all relationship property will be divided equally between the parties.  Relationship property can include assets (like cash, investments, real estate, chattels and so on), but it can also include debts (like hire purchases, credit card balances, bank loans, overdrafts and so on).   In other words, both assets and debts are usually shared equally between the parties.

Separate property (assets and liabilities) are not shared between the parties.  Instead, the person who owns the separate property will retain the asset or the debt as their own. 

Relationship debt or separate debt?

It is important to understand what a relationship debt is, so that parties can be aware of who will be responsible for it after they have separated. 

The law states that a “relationship debt” means a debt that has been incurred:

• By the spouses or partners jointly; or
• In the course of a common enterprise carried on by one or both of the partners; or
• For the purpose of acquiring, improving, or maintaining relationship property; or
• For the benefit of both spouses or partners in the course of managing the affairs of the household; or
• For the purpose of bringing up any child of the relationship.

This means, a debt can be a relationship debt, even if one of the parties was not aware of the debt. 

Take for example a situation where one partner’s job required him to purchase a share of his business and in order to do so he had to obtain a loan.  Regardless of whether the fact of the loan was disclosed to his spouse, if the business was one from which the couple derived income to support their relationship, that debt would be a relationship debt.

Similarly, if a spouse obtained a credit card without the knowledge or consent of their partner, and that credit card was used to purchase everyday household items, to pay for family holidays, or to assist with the upbringing of the couples’ children, then that credit card debt would be relationship debt.

We have assisted many clients in situations where they only became aware of debts after separation.

Having to accept responsibility for a debt, which you did not know about and to which you had not consented, especially during separation, can be quite traumatic.  Although you can never hope to account for every action of your partner, you can take steps to prevent being caught out in such a manner upon separation.

If you and your partner agree to enter into a Contracting Out Agreement, one of the terms could be to do with the retention or division of debt.  For example a clause could be included whereby each partner was responsible for any debts in their sole name regardless of the purpose for which the debt was incurred.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.