Separating couples can sometimes assume that once a property settlement is agreed, joint debts are also resolved. However, a family law agreement and a loan contract with a lender are separate arrangements.
A mortgage, personal loan or credit card held in both names can remain a joint obligation until it is refinanced, repaid or otherwise discharged, regardless of what the property settlement says about who is responsible for the debt.
Joint and several liability
It is important to note that after separation, a lender will not necessarily treat a joint debt as a 50/50 split.
Under the principle of joint and several liability, each borrower can be required to pay the full outstanding amount. If one person stops making repayments, the lender may pursue the other borrower for the entire debt or seek payment from both parties.
This can create problems where the parties have agreed that one person will take over the debt. Unless the lender has formally released the other borrower, both can remain exposed to the loan.
Can a court order affect the lender?
An agreement between separating parties does not automatically change a lender’s rights. However, the Family Law Act 1975 (Cth) does give the Court power in some circumstances to make orders that affect creditors.
Under section 90AE, the Court can order that one party be substituted for another in relation to a debt, provided the creditor is given procedural fairness and the relevant legal requirements are met.
This power was considered by the High Court in Commissioner of Taxation v Tomaras [2018] HCA 62. The case involved more than $250,000 in tax-related liabilities, with the wife seeking an order that her bankrupt husband be substituted as the person responsible for the debt.
The High Court confirmed that section 90AE could apply to a debt owed to the Commissioner of Taxation. It did not, however, order that the debt be transferred in that case, as the husband’s bankruptcy raised questions about whether the requirements for making the order could be met.
For most joint mortgages and personal loans, refinancing into one person’s name is still the more common way to release the other borrower. Where refinancing forms part of a property settlement, the agreement should clearly set out who will arrange it and the timeframe for doing so, so the other party is not left connected to the debt indefinitely.
How the court treats debt in the property pool
When determining a property settlement, the Court looks at what the parties own and what they owe. The amounts owing are then deducted from the value of the assets to establish the net property pool.
Once those financial obligations are identified, the Court can also consider how they arose and what they were used for. Amounts incurred for the benefit of the relationship, such as the family mortgage, a car loan or ordinary living expenses, may be treated as part of the shared financial position, regardless of whose name they are in.
Borrowing or spending undertaken by one person for their own purposes can be approached differently, particularly where it arises after separation. Personal expenditure or other commitments unrelated to the family may affect the final division between the parties.
Wastage and reckless spending after separation
A separate issue can arise where one party’s conduct reduces the property or financial resources available between them, commonly referred to as wastage.
Wastage can take different forms and, in some cases, it may involve deliberately disposing of assets or running up debt. In others, it may arise through reckless conduct such as gambling, excessive spending or financial decisions that significantly reduce the value of what remains. Section 79(5)(d) of the Family Law Act 1975 (Cth) now expressly requires the Court to consider material wastage caused intentionally or recklessly by either party.
The principle has existed in family law for many years. In Kowaliw and Kowaliw (1981) FLC 91-092, the husband allowed prospective purchasers of the matrimonial home to live in the property rent-free for approximately 12 months and was also responsible for business losses arising from reckless or negligent conduct. The Court found that the resulting financial loss should not simply be borne equally by both parties and attributed the consequences of that conduct to the husband.
The financial risk of redraw
A redraw facility allows borrowers to access extra repayments they have previously made on their home loan.
After separation, this can create an additional financial risk where either borrower is still able to access those funds without the other’s approval.
If one person redraws money from a joint mortgage, the amount owing on the loan increases and both borrowers can remain responsible for that higher balance. This can become particularly significant where funds are withdrawn before the parties have finalised their property settlement.
Depending on the terms of the loan, separating couples may be able to ask their lender to suspend redraw access or require both borrowers to authorise future withdrawals. Addressing this early can help prevent the amount owing from changing while the parties are working through their financial arrangements.
Credit cards, guarantors and other traps
A secondary or additional cardholder is not the same as a joint account holder. They may have a card in their own name and make purchases, but the primary cardholder generally remains responsible for the account and the transactions made using that card.
A joint credit account works differently because both people are account holders. While the account remains open, either person may continue to access the available credit, potentially increasing the balance owed by both parties.
Where a parent or another family member has guaranteed a home loan, they can remain financially connected to the couple long after the relationship has ended. If the borrowers are unable to meet the repayments, the lender may still look to the guarantor for payment, which can place any property they have provided as security at risk.
What to do immediately after separating
A few early steps can help separating couples get a clearer picture of their financial position and reduce the risk of shared arrangements remaining unresolved.
- Contact lenders about any joint accounts, mortgages and redraw facilities, including whether access can be restricted or require both parties’ approval.
- Close or reduce unused joint credit and cancel any additional cards that are no longer needed.
- Request a credit report to identify loans or other liabilities held in joint names.
- Gather copies of bank statements, loan documents and tax records while access to shared accounts is still available.
- Make sure any agreement about who will take responsibility for a mortgage, loan or other shared debt is formally documented.
- Where refinancing is required, clearly address who is responsible for completing it and when it needs to occur.
Getting advice
Taking these steps can help streamline the process, but legal advice may still be important in understanding how joint debts affect the overall property settlement and what options are available.
At Aubrey Brown Lawyers, our Family Law team can assist with property settlements involving joint debts and help ensure the financial arrangements between the parties are properly formalised.
