We discuss the treatment of debts in a financial order – before marriage, during marriage and after separation.
When deciding how the assets of a marriage are to be shared, we also have to look at how the debts are going to paid.
Debts may be brought to a marriage. If you start a marriage by paying off your new spouse’s debts, this money will not be reimbursed to you at a future point in the event of a divorce.
If debts build up during the marriage, these are usually in the name of one person. You may have an overdraft, credit card or a bank loan in an account in your sole name.
Some of this debt may have been built up on family expenses. If a loan has been taken out to build an extension, or to pay for school fees, this is a matrimonial debt which is going to have to be factored into the settlement. This means that even though that debt will be in one person’s name, the settlement will usually include a repayment of that debt from family money.
This means that if a family home is going to be sold, then if there are sufficient funds available from that sale, we would look to repay those debts from the sale proceeds. The same approach can be taken if a joint account has gone into overdraft. Once the house sale proceeds are available, the conveyancing solicitor can repay overdrawn bank accounts, and the accounts can then be closed.
However, the guiding principle of the family court is to ensure that financial needs are met. This means that housing children of the family is going to take priority, and if there is only enough money available to put down a deposit for one property, there may not be enough capital to repay debt. It will depend on how much money is available overall.
When we go to court to discuss finances, the court asks us to prepare a spreadsheet setting out all of the assets and debts belonging to both parties. This means that those significant debts which you or your spouse accrues will be included on that spreadsheet and will be part of the financial picture of your marriage. Although the debts have been accrued by one party, the debts will still be taken into account when calculating how matrimonial finances are to be dealt with.
If you or your spouse have run up significant debts on credit cards and loans during the marriage on their own spending, these debts will be relevant when considering mortgage capacity for a new home after divorce. Significant debt will affect affordability criteria on a new mortgage. This can affect how much money you each receive, as you may require a larger deposit as a result.
After separation, debt may build up as a result of paying legal fees. Again, this type of debt will be taken into account when dividing assets on divorce. If you or your spouse uses a loan to fund their legal fees, this will be included as a debt on the spreadsheet we produce for court hearings and the settlement will usually need to include a method for that debt to be repaid.
In a final financial order, there are provisions in there which make each spouse responsible for their own debts. The court can also require one spouse to be responsible for paying off debts on an ongoing basis if these have not been settled. However, the important point to remember is during the negotiations, debt accrued by one spouse, even after separation, is likely to be taken into account as a expense which that party is required to meet, and may require additional funds to repay.
