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The role of the financial settlement

Legally ending your marriage does not automatically end your financial ties to your ex-spouse. Until there is a court order in place dismissing your matrimonial claims, they remain open.

Therefore, it is extremely important that you get a financial agreement and that it is made into a legally binding financial consent order.

Any debt either of you have individually or as a couple will form part of the financial settlement.

  • Can I get divorced if I am in debt?

    The short answer is yes you can. Some couples may want to delay their divorce because they are in debt. However, this is not necessary and can lead to more problems.

    Money is often cited as a reason for divorce and can be a cause of tension in relationships. It can also be a reason why people put off getting divorced, as they want to wait until they can afford to live on a single income.

    If you have credit card debt, an overdraft, loan repayments, a mortgage, etc. then these are factored into your financial settlement. However, it is very important that you do disclose all debts, along with your other finances and assets as part of the financial disclosure process.

  • How is debt divided on divorce?

    Your financial disclosure should include any debts that you have, as well as how much is liable to be repaid and when e.g., each month or at the end of a fixed period. The debt will be divided into matrimonial and non-matrimonial debts.

    Matrimonial debt/marital debt is usually defined as debt built up from money used to benefit the couple or family, for example a house, a car, or a holiday.

    Non-matrimonial debt or individual debt is when debt has been incurred through one party spending money for their sole purpose. This can include things like gambling debts or solo holidays, or even post-separation costs like buying gifts for a new partner.

  • Who pays the debt in divorce?

    When it comes to matrimonial debt, it does not matter which party’s name it is under, both parties are jointly liable for paying the debt. This does mean that repayment would fall to you if your ex-partner refused to or could not pay. Payments on joint debts can continue even after the divorce itself is finalised.

    These debts will then be deducted from the marital pot.

    Individual debts will be liable to be paid off by the party who incurred the debt.

    The court’s powers on debt are limited. It cannot force one party to pay off a debt. Nor can it transfer a debt from one party to the other.

    However, a court may make orders to help one party pay off debt for which the couple are jointly liable. This may be in the form of maintenance payments or a lump sum payment to be used against the debt.

  • What happens if there are debts from before the marriage?

    In some cases, one or both parties bring debt into the marriage. If this is the case when the marriage ends and a financial settlement is being drawn up, the individual is likely to be responsible for the debt.

    Pre-marital debt is likely to fall under the title of ‘non-marital debt’. This means that the responsible party is the one who’s name the debt is in.

    Similarly, post-separation debt may well not form part of the financial settlement. However, this does depend on what the debt was used for.

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Hard and soft loans

The court makes a distinction between “hard” debts and “soft” debts. Hard debts are those which must be repaid and have the characteristics of commercial arrangements. Soft debts are more informal arrangements, such as where money is borrowed from family or friends, and where the recipient of the funds is not under the same commercial pressure to repay the loan.

In making decisions about financial matters, judges will treat soft loans differently. They may take the view that they do not need to be repaid and are akin to a gift, or that there is no strict timeframe for repayment and that the donor of the funds is unlikely to enforce repayment, whereas a hard loan will need to be seen as a true liability and considered in dividing up the assets.

“Hard” loans are generally considered under the following criteria:

  • It is an obligation to a finance company
  • The terms of the obligation have the feel of a normal commercial agreement
  • The obligation arises out of a written agreement
  • There is a written demand for payment, a threat of litigation
  • There has been no delay in requesting repayment
  • It is for an amount of money which is significant.

The following are factors which may indicate a “soft” loan:

  • The funds come from a friend or family member with whom the debtor remain on good terms and who is unlikely to want the debtor to suffer hardship.
  • The obligation arose informally, and the terms don’t have the feel of a normal commercial arrangement.
  • There has been no written demand for payment despite the date for payment having passed.
  • The amount of money is comparatively small, so that the creditor is likely to waive the obligation for repayment either wholly or partly.

It is important to remember these are not hard and fast rules, however. A judge will take unique circumstances into consideration.

Different types of debt

Student loans in divorce

Student loans are generally considered personal debts, although this may be different if the debt was incurred during the marriage e.g., you started your university course after you got married.

This means that the individual is liable to pay, and they will not form part of the marital pot.

Credit card debt in divorce

Responsibility to pay credit card debt depends on whether the account is a joint one or a personal one. The liability will be joint if the account is shared, but you may be solely responsible for a personal credit card.

However, the court will take into consideration whether the debt was incurred for the benefit of you both. For example, you may have a credit card in your sole name but the debt on the card is made up of family expenses like home improvements or family holidays. The court may decide that this counts as marital debt.

Creditors cannot chase you for repayment of debt incurred in your ex-spouse’s name. Nevertheless, the family court takes other factors into consideration when dividing debt.

It is important to obtain advice from a qualified financial advisor to understand your credit liabilities.

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