Debt and Divorce – What Happens to Personal Debts on Divorce?
29th January, 2024
Divorce is a difficult and emotionally taxing process that frequently has complicated financial implications.
Handling of personal debts is certainly an issue that couples must address within their divorce proceedings to ensure that assets and liabilities are divided between them fairly and to ensure that one party to the marriage is not left at a disadvantage.
The starting point is for marital assets to be divided on a 50/50 basis. However, not all financial matters are black and white.
To achieve a just and equitable distribution personal debts, including commercial debts and soft loans from friends and family, must be carefully considered. Loans like this can be too complicated to divide due to their nature, and often matters like these will require professional help from a divorce solicitor.
In this article, we will outline what happens to personal debts on divorce and clear up any confusion regarding the process. It is important to take independent legal advice as early as possible in your separation, to ensure that these matters are dealt with quickly and efficiently. Certainly, in circumstances where debts are significant.
What are personal debts?
Personal debt refers to any money that an individual owes to another individual or company. Some examples include student loans, mortgages, home equity loans, car loans, or credit card debt.
These debts are legally binding to the individual who took them out. However, this doesn’t mean that the person whose name the debt is is in necessarily solely responsibility for the entire debt.
If you can prove that your ex-partner benefitted from personal loans under your name, they should be divided accordingly as they will be considered matrimonial debts, irrespective of the fact they are in only one spouse’s name.
For example, you and your spouse may have incurred credit card debt in the sole name of one spouse, to pay for a family holiday or improvements on the family home, which clearly you have both benefited from. Therefore, it would be inequitable to expect only the spouse whose name the debt is in to be solely responsible.
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When can it get difficult?
Often family and friends provide couples with sums of money when they are starting out or if they find themselves in financial difficulty. In respect of soft loans from parents these are often referred to as being from the “Bank of Mum & Dad”.
Difficulties can occur with these loans because they are not legally binding, as such. They can be difficult for the courts to enforce due to their nature and lack of documentation.
Couples should talk about repaying these loans and determine whether they can be offset against other assets of the marriage when they are discussing financial settlement.
To obtain a fair settlement, such as a repayment plan or asset transfer, it’s critical to be honest and open and enter into full and frank financial disclosure with your spouse.
If you have any evidence that you both agreed to repay such loans, , present it to your divorce solicitor. It is certainly advisable when entering into such agreements with family and friends to draft and sign a Loan Agreement to set out clearly the terms of the loan, the amount loaned, who it is loaned to and from and the terms of repayment and if any interest will accrue. This can make things much easier later down the line when considering these soft loans within divorce proceedings, should they arise.
Commercial debts, whether related to a jointly owned business or individual business endeavour can add another layer of complexity to divorce proceedings.
Couples should create a thorough list of all commercial and company debts. Including information on the lenders, the amount owed, and the interest rates. This will help to determine which spouse is responsible for each company debt, before considering the allocation of responsibilities accordingly. This may vary depending on who incurred the debt or how the money was utilised.
As with the division of other debts, the division of business debts between couples can be negotiated between by your divorce solicitor or if suitable, mediated upon.
In the event an agreement cannot be reached and the assets in the case justify an application to Court, then a Financial Remedy application could be brought. Your divorce solicitor will advise you as to whether this is appropriate. Options may include creating a repayment plan or a debt transfer to one spouse, as appropriate.
Looking for a divorce solicitor?
Ward Hadaway is proud to have some of the region’s most experienced divorce solicitors located in Newcastle upon Tyne, Leeds and Manchester meaning no issue is ever too complicated. We also regularly meet with clients and potential clients remotely meaning we can use our expertise to also help those who do not live or work close to our offices. Please get in touch for a free, confidential chat about your situation and we’ll explain how we can help.
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Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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