Debt mixed with divorce creates a money minefield for the unwary

Warring couples may see a divorce as a way out, but it can create a fresh new financial mess for families. Here’s what to avoid.

When a marriage shatters, finances often break too. Picture: Getty Images

Debts in a divorce can add an extra layer of pain for clashing couples, and it is becoming more common as Australians today borrow more money for longer periods.

It’s not unusual for people to carry mortgages and other debts into retirement, and the growing trend of grey divorce – with one in three divorcing couples today aged over 50 – sees plenty getting sucked into debt traps.

Finance and legal specialists say professional advice is crucial when dealing with debt and divorce, because a do-it-yourself approach could dig a huge financial hole darker than a bad marriage.

Australian Family Lawyers says there are several key factors that affect debt division in a divorce, and overarching every consideration of the Family Court is the principle of “fair and equitable”.

This can even affect prenuptial and postnuptial agreements, it says, if the court thinks its provisions are unfair or that one partner signed it under duress, it says. “Instead, they’ll divide the debt according to what is fair and equitable.”

Custody arrangements also play a role, where the primary carer of children might get a smaller portion of shared debt so they are better-placed to look after the kids.

Experts say good advice is crucial for divorcing couples. Picture: iStock

Not all divorces end in courts, and Australian Family Lawyers senior associate Hannah Robinson said debt division could be “simple if agreed by both parties how the debt is to be dealt with”.

However, it also can be difficult “if there is a dispute and further accounting advice or forensic accounting is required”, Ms Robinson said.

She said she had noticed a rising number of couples divorcing with debt.

“A majority have large debts on homes, personal debts or debts owing to family,” she said.

Author and financial adviser Helen Baker also has noticed the trend.

“It’s mainly because people’s mortgages are so much higher due to the rising cost of property,” she said.

“Another reason is many couples have partners – one is a spender, one is saver, so many have credit card debt and car loans.”

Ms Baker said debt was part of the financial settlement in a divorce.

“Until then, generally both parties are still responsible for the debts together,” she said.

“You can do a financial settlement any time after six weeks.

“Haste can be good for control and protecting your credit rating, but speeding up can be a mistake.”

This was because emotions and uncertainty cold lead to people taking the wrong assets and not understanding the big picture, she said.

HOME TRUTHS

Lawyers organised signing the financial settlement, Ms Baker said, but people should not sign anything if they did not know its impact on their future finances.

“You definitely want to get onto the bank at the beginning so they know – they deal with this all the time,” she said.

Offset accounts and redraw facilities could be frozen, and Ms Baker said people should work with a mortgage broker to discover what they could afford before negotiating the financial settlement.

Coote Family Lawyers managing partner Gillian Coote said high interest rates had been a “real problem” for divorcing couples.

“It’s very difficult if you are living in a situation where you are only just meeting the mortgage payments, and then you split up and you have got to cover the cost of two households,” she said.

“But the basic principle is the first step in a property settlement is to work out what’s there in total.”

This applies to all assets and debts in a dissolving marriage.

Helen Baker, author and financial adviser. Picture: Supplied

“It doesn’t matter whether it’s in either or both names, it doesn’t matter whether it’s held in a company or a trust,” Ms Coote said. “The asset and the liability go into an asset pool and we end up with a net figure,” she said.

“All debts are considered across the board – including credit card debt, personal loans, hire purchase, car leases, they all go in and it all comes off the top line. And then we divide it.”

Once the debt is divided, often assets must be sold to pay it off. It may be impossible for a newly-single person to take on the full debt of a family home, especially if also caring for children.

“The principle of the Family Law Act is to make sure there is a clean break between couples, and that means getting rid of debt in one person’s name,” Ms Coote said.

“So you have to refinance, and if you think you can take on a mortgage to pay the other one out you have to be pretty careful,” she said.

“You can’t just transfer the house because the bank won’t let you without the mortgage being refinanced.”

TRAPS

Money issues often can be a cause of a break-up, not just something to be dealt with in the fallout.

A worst-case scenario for couples is having more debts than assets, and this does happen.

Ms Robinson said sometimes the sale of a property did not achieve any profit, leaving each partner with nothing.

Others must deal with debt issues even if only one member of the couple incurred them, but it impacts their “overall balance sheet”, she said.

Some debts are kept secret until the break-up, or may be the cause of the break-up, but Ms Coote said online banking and digital finance made debt harder to hide.

“If someone was hiding debts and not fessing up to them, that would be something you would need to think about,” she said.

“A lot of women don’t know their partner’s financial situation still in this day and age, which is really quite inconceivable but they still don’t,” she said.

Gillian Coote, founder and managing partner of Coote Family Lawyers. Picture: Supplied

In family law proceedings each partner must provide their bank statements, and Ms Coote said sometimes that was the only way a spouse discovered other bank accounts or payments to third parties.

“It’s a lot harder to conceal than it used to be,” she said.

“There is so much online – in the good old days we had to get paper statements. We had to get people to go to banks, and it was far more difficult.”

EACH DEBT DIFFERS

“We have to approach each debt as a separate problem and we have to deal with it,” Ms Coote said.

“As lawyers we have a bit of responsibility to make sure this can all happen. You’ve got to work it through.

“We use the parties’ accountants if we need to … it requires a process, and we examine every asset, look at all the documents. We look at the loan documents – we don’t just wave a magic wand, we read them, understand them and deal with them.”

The process often took longer than people expected, Ms Coote said.

“They always think it’s simpler than it is. Most people want it all done yesterday. That’s fair enough, I get that, I totally understand that, but you can’t.

“Where there are debts owing to third parties, you have another hurdle to get over.”

Another trap is when people try to sort out complex divorce arrangements without legal or financial advice.

“It’s a genuine world of pain, so making it worse by doing a what-you-think-is-enough job is not the answer,” Ms Coote said.

“You’ve got to be careful, look at what documents you signed, what loan agreements you signed, documents with the bank, a lot of people don’t know what they signed. I understand that too – they’re so boring.”

Ms Baker urged people to “make wise decisions, not emotional decisions”.

She said often women remained in the family home to keep stability for the kids, close to their school and friends.

“But they often can’t afford it if something goes wrong, and don’t have anything else – no super, no investments,” she said.

Couples struggle funding two properties during divorce proceedings. “Instead of two incomes for one home, you now have to fund two homes – that is two mortgages or renting – it’s wasted economies of scale and means more costs, less disposable income and less superannuation and investments for the long term.”

FRONT FOOT

If a marriage is rocky, be proactive ahead of a potential divorce.

“Make sure you know about all the debts all the time,” Ms Baker said.

“What are you signing up for? What is your partner signing up for?” she said, adding that people should consider what might happen to their credit rating.

“Most times someone is a spender, the other a saver, so you are responsible for their debt too, unless there are some specific circumstances that a lawyer can change.

“If the debt has been left to one partner through domestic violence, there are some organisations who are helping these people pay out the debt, but that’s usually just credit cards, small loans, not usually the mortgage.”

Ms Baker said couples with investment property should understand that the debt was not tied to the property. “They can be renegotiated in the settlement,” she said.

HOW COURTS CONSIDER OTHER DEBTS:

Gambling: The court could view this as wasting assets, and the person responsible for it may be held accountable. This also applies to excessively extravagant spending or hiding money.

Tax debts: Unpaid taxes are common in divorce, and generally seen as marital property because both parties benefited from taxable income. The court also considers who caused the tax debts.

Rental property: If a partner keeps an investment property, they will also be given the full mortgage relating to it.

Business debts: If both spouses are part of a family business, they both may be considered responsible for its debts. Personal and business debts are often intermingled.

Source: Australian Family Lawyers

Originally published as Debt mixed with divorce creates a money minefield for the unwary