Am I responsible for my spouse’s debt? 3 scenarios to consider

A life with zero debt is impossible for most Australians. However it doesn’t need to be an overwhelming or permanent part of life. 

By Michael Sheahan, Legal Administration Assistant at Roger Fritz LLP, Brisbane.

If you have studied, you probably have a HECS debt. Owning a house is nearly impossible without a mortgage. One survey concluded that  the average Aussie is more than $20,000 in debt, and this is without accounting for home loans. When we include mortgages, this figure increases to a staggering $261,492. That is why it is important for couples to communicate their respective financial positions before entering a committed relationship.

 Spending your life with someone is risk. Love can be blind, and while you may wish to share your life with someone you may not wish to share their debt. We often get asked the question from financially prudent clients: Am I responsible for my partner’s debt in Australia? 

What are the common ways most people get into debt?

Mortgages

Mortgages are the largest and most common form of debt in Australia. According to ANZ’s newsroom, household debt has more than quadrupled in the last 20 years, and almost all of this can be attributed to an increase in finance for housing. For the vast majority of Australians, owning a house is impossible without a mortgage. According to the Australian Institute of Health and Welfare: 

• 35% of Aussie adults have a mortgage;
• 32% of Aussie adults own a house and are mortgage-free;
• 31% of Aussie adults are renting.

Personal loans 

There are many reasons you might get a personal loan. The most common reason Aussies take out a personal loan is to buy a car (20%), but you may get a loan to do some renovations, pay for medical expenses, or invest. Aussies are increasingly turning to personal loans to pay for household expenses with the ever-increasing cost of living. 

Credit cards 

There is currently over $40 billion in credit card debt in Australia. This is a particularly insidious form of debt that can quickly spiral out of control. 

Am I legally responsible for my spouse’s debt?

The short answer is no. Whether marriage, de facto, or fling, you are not legally responsible for your partner’s debt. You may be responsible for the debt that you apply for jointly, or where you are the guarantor of your partner’s loans. Your partner’s debt could still impact your personal finances. 

1. Responsibility for joint loans

While you may not be responsible for loans that are solely in your spouse’s name, many couples apply for loans jointly. The law considers that where loans are granted jointly both you and your partner have 100% responsibility for the entirety of the loan. If your partner were to have an unforeseen event or be unable to meet their share, then you may be responsible for repaying the whole of the debt and not half. 

2. Responsibility as a Guarantor

If you act as a guarantor for your former or ex-partner’s loan, then their failure to repay their loan can have serious financial consequences. You may have to repay the entire debt and the interest it has accrued.  Your credit score may be affected, and this will reduce the likelihood of any future loan you might apply for being approved. Further, if you have provided your assets as security, say your house or car for example, then the entity that granted your partner the loan may claim these assets to pay off the debt. 

3. What about where you have joint assets?

Even if your loved one is up to their ears in their own credit card debt and outstanding invoices, as long as you are not a guarantor or joint applicant, then you will not be responsible for your partner’s debt. However, when you have assets that you and your partner own jointly, then the bank may be able to use these assets to repay the loan if your partner cannot make repayments and defaults on their loan. 

How do I avoid being responsible for hidden spousal debt?

Before committing to a serious relationship, it is advisable to have a conversation with your partner about your finances. It is important to know the extent of your partner’s assets and debts before you enter a legal relationship. These can be de facto relationships, civil unions, or marriage. It is important to remember that you can be found to be in a de facto relationship with your partner if you live with your partner “on a genuine domestic basis”. This is normally after 2 years of cohabitation, but you may be found to be in a de facto earlier than this, or you may have cohabited for a decade and still not be considered in a de facto relationship. The classification of your relationship is important in this context when it comes to a property settlement after separation. 

If your partner has secretly accrued debt, then the court will consider this in determining how assets should be divided after separation.

The best way to insulate your relationship against the costly and conflict-ridden prospect of a property separation through the court system is a Binding Financial Agreement, colloquially known as a ‘Pre-Nup’. Despite standing for “Prenuptial Agreement”, a BFA can be made before, during, or after separation, and you do not need to be planning on getting married. To get a BFA parties need to disclose their financial position, and so any hidden debt would be detected. It would also set out the terms of property division in the event of separation. This can be an excellent shield against unwanted debt that you didn’t accrue, or footing the bill for your former partner’s financial blunders.

Expect the best but prepare for the worst?

If you have regained control over a significant debt then you may remember that feeling of liberation; like taking off a heavy backpack that you didn’t know you were wearing. Where there’s a risk of being left holding the bag for your partner’s loan, it is important that you seek expert advice. 

If you think that this could be you, or if you need some questions answered about partner debt, then fill out the form below and our friendly team will be in touch. They can connect you to one of our family law experts who can help you get some peace of mind.