National UK Debt is reported to be at over £900 billion; one of the highest levels in a country which boasts one of the strongest economies in the world. With an average total debt per household estimated at £55,504 and rising, it is questionable whether we will ever be in a position to repay our debts.
One of the major factors which contributes to the national debt is unaffordable borrowing. The Financial Conduct Authority reports that divorce is one of the major factors impacting unaffordable borrowing by individuals.
What are the Court’s Powers in relation to debt?
With more and more married couples in debt, questions often arise as to what should happen with these debts on the breakdown of a marriage. Even in cases where there are plenty of assets, it is common for there to also be debts. How these should be dealt with can often become a bone of contention in financial remedy proceedings.
In divorce cases the Family Court may be asked to consider how to deal with:
- Joint debt
- Debt which is borrowed in one party’s name but is in reality for the benefit of both parties
- Debts which are incurred in joint names for the benefit of one party
- Debt incurred by either party post separation
- Debt which is owed to family members
The Court has limited powers with regards the financial orders it can make on divorce and consequently how it deals with debt. How the Court decides the outcome of a case will be on the basis of its individual circumstances as no two cases are the same. It is important to seek legal advice at the outset of your matter as often the issue of who takes on debt will need to be agreed sooner rather than later, to avoid falling into any arrears with repayments.
It is important to note that the Court cannot alter the responsibility for a debt or attach a debt to one of the parties where it is in the other party’s name. Instead the Court can only seek to redress inequality caused by one party having to repay all of the debt by making financial orders which apportion the assets in a way which balances this. The Court can do this by first considering which debts are ‘matrimonial’ and which are not. The general rule is that expenditure incurred for the benefit of either the parties, or the family as a whole, is likely to be considered ‘matrimonial’. On the other hand, money spent on one party’s personal pursuits may not be. Again, this is not a hard and fast rule and the Court may also take a wider view on what is ‘matrimonial’, in some cases classing all debts incurred during the relationship ‘matrimonial’ even where these were clearly for the benefit of one party.
Credit cards
Credit cards will usually be the legal responsibility of one party but that party’s obligation to repay may be taken into account when dividing other assets. The Court may take the approach that if one party is paying off matrimonial debt then their obligation to pay spousal maintenance is reduced by the amount they are paying towards debt.
Property
Where a property is subject to a joint mortgage, the Court may order that one party pays the mortgage and that ultimately, that party will benefit from a larger proportion of the property when sold. The Court might do this where, for example, due to the amount of debt involved, one of the parties would not be in a position to borrow further monies to take on the mortgage in their sole name or be housed elsewhere. It is usually the case that the person living in a property will be responsible for the mortgage repayments but if that party has very limited means through their own income then the Court may address this with spousal maintenance payments.
The Court may also draw distinctions between ‘hard’ and ‘soft’ loans when considering debt and might say that a loan from a family member, for example, should not be treated as a priority and instead focus the order on repayment of loans secured against any property or held with financial institutions for which the repercussions of failing to make payment are likely to be more detrimental.
As the Court’s powers are limited, agreeing matters can allow for greater flexibility and creativity when it comes to apportionment of debts and distribution of assets. It is therefore almost always best to try and agree who should take on which debts rather than argue about them in Court, the costs for which can often become disproportionate and lead to the parties owing further debt for legal costs.
Finances on Divorce – achieving a ‘clean break’
While you may have separated, or even divorced, your financial ties to your ex remain open indefinitely, until the Court orders a clean break. This can be done either by agreement, in the form of a Consent Order, or can be imposed upon the parties by a Court Order at the conclusion of financial proceedings.
While the starting point in dividing assets on divorce is a 50:50 split of all assets (less the debts) of the marriage, there are a number of factors which the Court can consider in determining whether it should defer from this presumption in favour of equality. In a case with limited assets, ensuring the parties’ needs are met is likely to override any of the other factors a Court can consider. Where there are more debts than assets, achieving any kind of financial settlement but in particular a clean break can be tricky.
A family law solicitor can advise on the practical measures you should take to protect yourself and avoid disputes about debt. If you find yourself contemplating divorce, you should seek advice from a family lawyer as early as possible as resolution in the Family Court can take a considerable length of time and the repercussions of not making repayments to your creditors and getting into ‘unaffordable debt’ can have long term impact on your financial and emotional well-being and health.