Are debts shared in a divorce?

The Family Law Act (1975) sets out the general principles the court considers when deciding financial disputes after the breakdown of a marriage. Generally speaking, this involves working out what your joint and respective net assets, liabilities and superannuation interests amount to.

If you have recently separated or are considering separating from your current partner, you might therefore be asking yourself which debts you are likely to be liable for in the post-separation settlement.

Broadly speaking, in the same way that all marital assets will be considered during a post-separation settlement, so too must any debts (although there are a couple of exceptions to this).

However, there is no set formula for deciding how your debts and assets will be divided.

Instead, the way that your assets and liabilities will be split between you and your spouse will depend on your individual circumstances.

In determining what each party is entitled to in a family law separation, the first step is to add up the value of all the assets and subtract the value of all the debts to get a net ‘pool’ of assets.

When it comes to considering how debt will be divided, various factors, such as the final division of assets, each party’s respective income earning capacity and each party’s capacity to service a debt is considered, amongst other things.

Am I responsible for my spouse’s debts in a divorce?

In the absence of evidence that a party has engaged in conduct that has amounted to ‘waste’, the court has generally presumed that debts incurred during the relationship were accrued as a result of the ‘economic partnership’ of the relationship, and that any losses or liabilities should be shared.

However, where there is evidence of ‘waste’ – that is, where there has been financial loss resulting from:

• a party’s conduct that was designed to reduce the value of matrimonial assets; or
• a party has recklessly, negligently or wantonly engaged in action that has reduced the value of an asset or increased the liabilities of the parties;

the party responsible for such action will usually end up responsible for the debt and/or the liability will be notionally added back into the pool on the responsible party’s side of the ledger (i.e. taken by that party as a premature distribution of property).

In previous cases, courts have considered the following expenses as attempts to dissipate the asset pool:

• Letting other people use assets for free;
• Gambling debts, alcohol abuse or drug addiction;
• Selling an asset from the pool and spending the money raised.

However, you should keep in mind that the court will not consider anything that could be deemed as a ‘reasonable expense’ as wastage.

In addition, while the court has the power to decide whether to disregard or discount a particular unsecured debt of a party, it cannot write the debt off. In instances such as this, the party who has incurred the debt will be left to pay the debt with his or her share of the property order with respect to property settlement. On the other hand, the innocent party will not be held accountable for the debt.

What if the debts were accrued after we separated?

While the net asset pool is calculated by deducting the debts of the parties from the value of their property, debts that are vague, uncertain or unlikely to be enforced (such as an unsecured loan from a parent of a party), or debts that are unreasonably incurred, are likely to be excluded (but not ignored) from the calculation of the net asset pool.

Furthermore, in most circumstances, each party is responsible for paying their own legal costs associated with the proceedings (or the family law matter) and legal costs that are paid from joint funds will usually be ‘added back’ to the pool of assets and taken into account on a final basis by the party who benefited.

It is also open to the court to take into account any liabilities incurred by the parties in circumstances where one party was unable to support themselves adequately from their own income and/or resources, particularly where the other party had an obligation and capacity to support that party, but failed in their responsibility to do so.