If you are getting divorced and have debts, you will have to deal with the practicalities, such as who is legally responsible. Debt doesn’t simply disappear when you separate or get divorced. So what happens, and does your spouse have to pay your debts? Read on to find out.
How is debt divided during separation/divorce?
Any debts that have been incurred during the marriage or civil partnership will need to be deducted from the matrimonial pot, if possible. Generally speaking, it doesn’t matter whether the debts were accrued by an individual or they are jointly owed, any liabilities built up during the marriage/civil partnership simply reduces the overall level of assets to be divided. However, if individual debts are disputed, it would need to be shown than the debts were accrued for the benefit of the family. If they only served one party, for example, taking out a loan to climb Machu Picchu, then the court would be unlikely to make allowances.
If the debts are higher than the total amount of available assets, then the parties will need to come to an arrangement about how to deal with the ongoing payments. For excessive levels of debt, there may be some merit in considering personal bankruptcy. Such a decision should not be taken lightly, and legal advice should be sought as to the potential ramifications.
Who pays the debt in a separation/divorce?
Debts taken out in the name of one party will legally remain their responsibility, even if the court makes an adjustment to allow for the debt to be paid off. This is because the creditor only holds those responsible named on the finance agreement, and will chase them personally for payment. Joint debts cannot be so easily divided since each party is responsible for the whole joint debt including the other party’s share.
As with assets brought into a marriage, the responsibility for the debt held by an individual before marriage depends on the length of the marriage/civil partnership and whether the parties finances have been mingled. In essence, where either party brings debt into a marriage, the source of the debts becomes less important as time goes on and will gradually be seen as part of the joint financial landscape. If non-matrimonial debt becomes mingled with matrimonial finances over time, it becomes difficult to distinguish one from the other. Here, it is more likely that they will form part of the overall matrimonial picture.
What powers do the court have to deal with debts on divorce?
The court has limited powers for dealing with debts during divorce. It is unable to reassign individual debts since these remain contractual between the party who took out the finance and the lender. It does have the ability to balance out the wider financial settlement in such a way as to cater to the fact that one party will be left paying debts by awarding them a higher percentage of the matrimonial pot. It is then up to the owing spouse to ensure they pay off what is owed. If they fail to pay the debt, then the lender will pursue them personally for non-payment.
Do I have to pay my spouse’s credit card bills?
Regarding each other’s own personal debt, if the credit card is in a spouse’s sole name, then generally speaking, you are not liable. However, a court has the power to order a payment towards them if it can be shown that the debts arose because of family spending. This could be payments towards food shopping, bills, or school uniform, for example.
What happens to debt incurred after separation?
In the intervening period where a couple have separated but are not yet divorced, it is possible for either party to accrue significant debt. Until a final financial settlement is in place, any newly acquired debts can end up being factored into the overall order. That said, the court will consider what is reasonable, so if one party is obviously trying to reduce the matrimonial pot by excessive spending, it can decide they are entitled to a lower percentage.
Are all types of debt treated the same?
Mortgages tend to be treated differently to other debts, particularly where it relates to the former family home. The equity in a mortgage will generally be added to the matrimonial pot as an asset. If the property is being sold, the balance left to pay will not be deducted from the value since the mortgage will be satisfied on sale. If one party is to remain living in the family home, then the mortgage may be taken into account when calculating the net value of the property.
Do cohabiting couples have to pay their partners debt if they separate?
Cohabitees are responsible for all debts that are in their sole name. However, in respect of joint debts, both partners will be responsible for the whole debt alongside the other. If either party defaults on payment of a joint debt, then the lender can pursue either party for the total amount. This is generally the person most likely to be able to pay, although this may not necessarily be information they readily have to hand at the start of the enforcement process.
If one partner has a debt for which the other is named as guarantor, in the event of default, the guarantor will be legally responsible for paying the outstanding amount.
Can a credit record be affected by a former partner/spouse?
When partners live at the same property and one of them acquires a poor or downgraded credit score, this can adversely affect the credit record of the other spouse/partner. Over time, this can improve and be corrected, particularly once you have separate addresses, but it can be a lengthy process. This can be very difficult for the innocent party, especially at a time when they are attempting to re-establish themselves following separation.
Separating couples should be encouraged to reach an agreement as to how their finances should be adjusted following separation, divorce, or dissolution. The question of how debts are paid is just one of many issues that needs to be considered when arriving at a fair settlement and tends to be linked to several other financial factors. Seeking advice from a solicitor experienced in these matters is recommended in order to avoid unexpected pitfalls.
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