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Till debt do us part: what happens to debt in divorce?

Kit Klarenberg
Written By:
Kit Klarenberg

While the division of assets is a fundamental consideration in any divorce, so too is the division of debt.

Debt is an issue which can affect any marriage, and any divorce as a result.

“Even in the wealthiest of divorce cases, it is likely that one or both parties will have debts that need to be addressed within the proceedings,” notes Judith Fitton, partner at full-service law firm Mundays.

In an ideal world, Fitton believes these debts would be settled from funds available at the time of divorce – “the slate wiped clean, enabling both parties to start again”.

Dividing debts

Often, courts automatically divide debts, adding up the liabilities of each party and then deducting this combined figure from total assets. Any net assets remaining will be shared depending on circumstances.

However, Claire Lawton, senior associate at family law firm Pannone LLP, notes this process isn’t always quite so simple and direct.

“In some situations, courts will look more closely at debts, considering the purpose of a liability, and the use to which the funds were put – in essence, they’ll consider whether a debt was used to benefit both partners, or just one,” she says.

“For example, if a debt was incurred as a result of a husband purchasing a motorbike, or a wife’s online gambling addiction, the court will assign responsibility for repaying that debt to them individually.”

The timing of when a debt was incurred (i.e. before, during or after marriage) is also relevant to courts.

“Courts generally only divide responsibility for a debt incurred during a marriage – which means if your former partner married you with large debts, they’ll remain responsible for them,” Lawton concludes.

Share accounts, connect credit scores

While responsibility for pre-martial debt may not be communal, liability can be shared in other ways – for instance, via sharing financial products.

Sharing products can be a simpler way of managing money for couples, and represent a significant milestone in a relationship. Nevertheless, it has significant financial implications for both parties.

When two people apply for a financial product together, their individual credit scores are automatically linked by ratings agencies. A consumer’s credit score could be negatively impacted if their partner has a negative financial history – and if their partner’s poor conduct continues, it will continue to be adversely affected. uSwitch.com research suggests 30 per cent of consumers who have shared a financial product saw their credit score worsen as a result.

For Lawton, this highlights the importance of paying off shared liabilities, such as mortgages, with shared accounts.

“With a joint account, either partner can check that liabilities are being met and agreed deposits made at any time – if payments go out of your partner’s account, there’s the risk they could halt them, or stop paying their way,” she says.

“It could take weeks or months for you to detect this, by which time your credit score could be in tatters – as will your chances of being able to secure another mortgage.”

It is possible to break the credit connection you have with an ex-partner. A ‘disassociation’ can be requested from Experian via this online form, although any joint accounts you maintained together must be closed or transferred to a single name before you can disassociate.

Shared products, shared liability

The provision of ‘joint and several liability’ applies to shared financial products (such as loans, overdrafts and mortgages), and means each partner is equally liable for repayment of any money owed. If one partner can’t or won’t pay, the other must in full.

This would seem to present an obvious issue if a partner defaults. However, Caroline Hamilton, counsellor at debt management charity StepChange, notes banks do consider individual circumstances and have to consider compromises in hardship cases

“If you’re struggling with repaying a loan, talk to the provider, and outline your situation. If you’re not earning, or your partner is earning considerably more than you are, they will likely pursue them for repayment instead,” she states.

“If neither of you are in a position to repay a debt according to its pre-agreed framework, the bank may well work with you to arrange a ‘friendlier’ repayment plan. If you’re partway through repaying a debt, you may be able to arrange a ‘loan repayment holiday’ – a brief set period in which you don’t have to pay anything back, your debt doesn’t grow and you aren’t penalised through fees.”

In any event, Fitton believes open and regular communication with lenders is vital – if a bank isn’t kept up to date, they are more likely to demand early repayment.

Financial abuse

Further exacerbating the issue of debt in divorce is the prospect of financial abuse – emptying joint accounts, running up debts on joint credit products, and spending money earmarked for paying off shared loans (such as mortgages).

Financial Ombudsman Service figures indicate around 350 of mortgage-related complaints received annually to “problems where one partner has taken out additional borrowing against the mortgage without the other party being aware”.

Lawton records an increase in financial abuse committed by ex-partners in recent years.

“Such behaviour has always been a problem, but it has increased significantly in the past decade or so – it’s something we’ve seen in couples in every income bracket, from very high earners down,” she states.

“This isn’t always malicious – sometimes, people go on a spending spree to alleviate the pain of a breakup, without thinking about the impact it will have on their former partner. Whether deliberate or not though, it can be immensely damaging.”

Protecting oneself from such abuse can be difficult, too. While joint accounts can be frozen to prevent unreasonable spending, Fitton notes this is impossible if the accounts are used to pay essential direct debits, such as the mortgage or utility bills.

Responsible conduct

Luckily for individuals who fall victim to financially irresponsible ex-partners, courts take a dim view of intransigent and malicious behaviour, and perpetrators can be penalised. Fitton further notes courts view ex-partners who demonstrate financial prudence or responsibility positively.

“Courts give credit to parties who voluntarily settle a joint debt early on in the negotiations, just to get it out of the way – even if the debt is in the name of the other party,” she states.

However, Fitton also warns against trying to be excessively frugal during divorce proceedings.

“If a wife and mother manages on a low sum between the date of separation and a Court hearing, there is a danger a husband will argue she can reduce her lifestyle in such a way on a permanent basis, and may not need any maintenance,” she concludes.