Divorce negotiations often focus on who gets what from the matrimonial pot, but what if one or both partners have a considerable debt?
Significant debts are considered when addressing the finances of a marriage and can be incorporated within any financial settlement, which why it is important for both parties to exchange information and make a full and frank financial disclosure, including any debts, whether in their sole or joint names.
How the Family Courts treats debt depends on many factors including the size of the debt compared to the value of the matrimonial assets, the type of debt, when it occurred and who benefitted from it.
Hard or Soft Loans
A debt can take many forms, including a mortgage, credit card debt or car loans. When assessing debt, the Family Court considers the realistic expectation of a significant debt being repaid and if it is not, whether there will be any enforcement of repayment.
This usually separates formal loans, known as ‘hard loans’, from informal ones often received from family members or friends, known as ‘soft loans’.
In such circumstances, the Court will firstly try to determine whether this money should be considered a gift or a loan. If the money is classified as a loan, the general guidance on its distinction between hard and soft is as follows:
A soft loan:
- is usually provided by a friend or family member with whom the borrower is on good terms
- the lender is unlikely to want the borrower to suffer hardship
- Is an informal arrangement and not in writing
- no written demand for payment has been made
A hard loan on the other hand:
- is usually provided by a commercial lender such as a bank or loan provider
- the terms of the loan obligation are arranged like a commercial agreement
- penalties will be incurred if not repaid
- there is no delay in enforcing the loan
As a general rule, as hard debts are easily identifiable and are backed by legal documentation, the Court will take them into account when determining the overall financial settlement. Soft debts, however, where there is no written agreement or paper trail, are often not factored in by the Court as a liability on divorce.
Matrimonial Debt
Whilst a company that provides a loan will deem the named person on the debt to be solely responsible for it, the Family Court takes a slightly different approach when working out the matrimonial finances.
The Court considers ‘matrimonial debts’ to be debts that both spouses benefitted from during the marriage, regardless of whose name the debt is in. Examples are a mortgage for the family home, a loan for a family holiday for which both parties benefitted, a loan for a car or home improvements.
Debts that originate from a time before the marriage can also be deemed to be marital debts if the couple’s finances were merged during the marriage.
If a debt is in a sole name but the Family Court takes the view that is a joint debt, the Court does not have the power to reassign debts, but it can make an order that one party receives a greater share of the marital assets to account for the fact they have this debt in their name or make an order that the other party makes payments to the person whose name is associated with the debt to help them pay it off.
Individual debt
Individual debt is considered to be a debt that only ‘benefits’ one party, for example, a gambling debt, and the Court may disregard this when determining the financial settlement.
If one party hid their debts, the other party would have to prove to the Court they had no knowledge of the debt and that the debt was for their spouse’s sole benefit. However, if a party has knowingly tolerated their spouse’s spending during the marriage, the Court is likely to take their debt into account.
Significant debts incurred before the marriage, that only benefitted the person who took out the loan, are also more likely to be considered a sole debt and usually the spouse who entered the marriage with that debt will be determined as solely responsible for it e.g. a student loan for a degree.
Debts incurred after separation
Separation does not sever the financial association between parties. Where one spouse continues to incur matrimonial debt in their sole name after a separation, both spouses will still be jointly responsible for discharging it and debts must continue to be repaid until a financial dispute has been formally settled by a Court or mediation.
Debts occurring after separation, that can be shown is for the benefit of the family – even though the couple may now live apart e.g. a holiday or school fee, will also be considered for inclusion in the matrimonial pot.
How we can help
We can help you to understand your options during the divorce process and how debts should be fairly considered as part of your financial settlement.
For a confidential discussion about the divorce procedure, please contact Richard Rodway in our Henley office on T: 01491 570 900, office or Julia Drury, Sophie Perry or Ruby Tufail in our Reading office on T: 0118 975 6622, all of whom will be happy to have an initial conversation about your circumstances.