What happens to debts when you divorce?
Sorting out debts when you divorce is as important as separating other assets – some would even say more important, as unaffordable loan repayments, credit card bills and black marks on your credit profile can all affect your ability to move on with your life.
Divorce solicitor Chris Miller explains how debt works in relation to divorce.
Debt can often be a tricky area for divorcing couples, as a surprising number of people don’t really discuss it while they’re married.
Most will know if they’re in a joint mortgage of course, but many spouses in modern marriages maintain separate credit cards, bank accounts and other financial products, with the result that each is left in the dark about the other’s use of credit.
The law in this area can be complex for non-lawyers to understand. On the one hand, the family courts tend to presume (until proven otherwise) that debts incurred during a marriage are on behalf of the family, so can be deducted from the ‘pot’ of assets available for distribution, thus potentially reducing the other party’s share.
On the other hand, it’s clear that any debt in your name (or joint names) is one that you are personally liable for. So even if the holiday you paid for on your credit card was for both of you, you’re still responsible for paying it all off.
Who pays the mortgage when you get divorced?
In practice, the biggest debt and the one most divorcees worry about is the mortgage. How this is dealt with depends on the state of each individual’s finances and access to credit.
If the house is going to be sold, the value of the remaining mortgage is calculated and deducted from the value of the property. What’s left – known as the net value – goes into the ‘pot’ for distribution.
If one spouse needs to remain in the property (typically to minimise disruption to the children), a number of questions arise. One is how the net value of the property is to be shared between the parties, and how and when the non-occupying party will receive his or her share.
The next point to consider is whether they can afford the mortgage repayments alone and whether the mortgage company will agree to transfer the mortgage into their sole name.
Often if they have low earnings or a poor credit history, the mortgage provider may be reluctant.
If this happens, then the mortgage remains in joint names and both parties are liable for it. This presents issues for the spouse leaving the property, as they don’t want to continue paying for a house which they can’t live in or sell, , especially as they will have their own housing costs to consider as well.
In these situations, one solution is for the ex-couple to form a binding legal agreement between themselves – known as a Deed of Trust. This way, although the mortgage remains in joint names, one person can undertake to meet all the monthly repayments – effectively indemnifying their ex-partner against the debt.
Who’s responsible for credit cards, car loans and other debts after the divorce?
As mentioned above, family courts presume that debts incurred during a marriage are familial debts until shown to be otherwise. This means they can be deducted from the total value of the assets for distribution unless there’s a good reason not to do so.
In theory this means that if one person’s debts exceed their assets, they will be making a negative contribution and therefore get more out than they put in.
Debts which have been reasonably incurred after the marriage by one person can also be deducted from their contribution.
The key test here is that of “reasonableness” – it may be reasonable to incur debt while finding new accommodation, for example. It may be less reasonable to incur it while purchasing three new sports cars!
Can I be forced to pay my partner’s debts?
As far as creditors are concerned, the debt belongs to the person whose name is on the bill.
At the same time, if an ex-couple own joint assets, credit companies can try to recoup their money from the debtor’s share.
Let’s take an example of a situation that I’ve seen in the past. A husband and wife separate – she stays in the former marital home, while he finds alternative accommodation.
He has considerable credit card debts, which he adds to after the separation. Ultimately he falls behind in his repayments. His creditors then decide to claw back their money.
Because the property is still in joint names, they are entitled to claim against his share in the property and send the bailiffs in – or, worse still, secure a charge against his share of the property and obtain a court order for the whole house to be sold so they can get their money.
This example hopefully illustrates the importance of getting sound legal advice on financial separation at an early stage. A divorce solicitor can help you minimise risks, for example by getting the property transferred into the wife’s sole name in the example above.