How is debt divided in divorce? 9 influential legal factors

When you’re going through a separation or divorce, it’s quite common to talk about what’s going to happen with your assets, like the family home or your savings accounts. But we don’t often talk about debt. 

However, most Australians who divorce will be divorcing with debt. And that means you have to know how your debt will be treated during that separation and divorce.

How is debt divided in divorce?

When it comes to debt and divorce, debt isn’t really treated differently from assets. In Australia, both spouses are generally responsible for joint debts, whether they’re credit cards, mortgages, car loans or something else entirely.

So, when you divorce, just as your assets become part the property pool, your debts do as well. And just like your assets, they’re then divided according to what is fair and equitable. 

In general debts you can think about debts as being treated in one of two ways when divorcing.

1. First, some debt will stay with the person who incurred it. This is generally debt that is acquired before the marriage or that is considered to be the sole responsibility of one party.
2. Second, some debt will be allocated to the property pool and divided between the parties along with their assets.

Debt acquired before marriage versus after marriage

In most cases the preference is that debts are paid as part of the property settlement. This means that each party can move ahead with their lives free of historical debt. 

However, debts that are acquired by one person before they enter into the relationship might remain the sole responsibility of that person. This is option one above.

However, these distinctions might blur in the situation where a personal debt benefitted the marriage. An example might be a home purchased by one partner that ultimately becomes the family home in a long-term marriage. In that case, the debt will become part of the general property pool, option two above, and divided equitably.

How is debt divided in divorce: 9 influential factors 

When it comes to dividing debt in a property pool, the Court will look at a number of factors. However, overarching every consideration is the principle of ‘fair and equitable’ and the Court will ultimately ensure that all debt division is done according to this principle.

1. Binding financial agreements (aka prenuptial or postnuptial agreements)

If there’s a binding financial agreement (BFA) in place (often referred to as a prenuptial or postnuptial agreement) then the Court will typically follow the provisions of that agreement. In many cases these will deal with the property (and the debt!) brought in by parties prior to the relationship.

However, if the Court takes a look at the provisions of a BFA and thinks they’re unfair or unequitable, or if they believe that one party entered into the BFA under duress, then they won’t hold up the arrangements. Instead, they’ll divide the debt according to what is fair and equitable.

2. Purpose of debt

For all debt, the Court will consider whether it was incurred for the benefit of the relationship. It doesn’t matter whether the debt is in one spouse’s name, or both – if it was incurred to benefit both parties, then it becomes part of the property pool.

An example of this might be a car loan for a larger vehicle after the birth of a child. Even if only one partner signed for the loan, it would be considered a benefit to both (and the entire family!). On the other hand, if one partner accrued a gambling debt, this would be more likely be assigned to that person individually.

3. Custody arrangements

If one spouse is given primary custody of the Financial Institutions, they might need more financial support than the other spouse. This might also mean that they get a smaller portion of what might otherwise be shared debt in order to be in a better financial position to take care of those Financial Institutions.

4. Ability to pay the debt

Sometimes one partner will have a higher future earning potential, more income or more financial stability. In this case, that partner might be assigned a larger portion of the debt overall.

5. Ownership of assets

If one partner is given the full ownership of a particular asset in the property division – for example, a rental property – they will also be given the full debt that relates to that asset – for example, the mortgage on the property.

6. Wasting assets

Gambling, excessively extravagant spending or even hiding money will be considered by the Court to be wasting assets. The person responsible for that waste may be held accountable for those debts.

7. Tax debts

Tax debts like unpaid taxes are common in divorce. In general, the Court will consider this as marital property when the relationship benefitted from the income (which will be most cases). However, they’ll also consider who bore the responsibility for tax liabilities in the first place.

8. Business debts

In situations where there is a family business, there are often related debts. If both spouses are part of that business, then both may be considered responsible for those debts. This is particularly true in situations where personal and business finances have been intermingled, which can often happen with sole traders and small businesses.

9. Good faith efforts

If one party has tried in good faith to pay down marital debt, the Court might consider this when dividing up the responsibility for it in the property pool.

Get help navigating your debt division

If you’re facing a separation or divorce, and wondering how debt is divided in divorce, it pays to get the best legal advice.

Our expert team is on hand to help you understand the process of property and debt division and can offer tailored advice to ensure you get the best outcomes for your situation.

Request a call back from our supportive team via the form below.