Divorce and debts are issues that often overlap especially during tough economic times. Both issues can have lasting legal and financial implications on both parties. Here is an overview of how divorce and debts are typically handled in England and Wales.
What are the different types of debt?
Hard loans
A hard loan is a commercial loan arrangement that is treated as a formal debt by the courts when dividing assets during divorce proceedings.
Factors that indicate a hard loan include the lender is a financial institution rather than a family member or friend, and there is a formal written agreement with clear terms. When a loan is classified as a “hard” loan it is usually treated as a legitimate debt that needs to be repaid.
Soft loans
The term soft loan refers to informal loans made by family members or close friends on very flexible terms, often with no formal loan agreement, no repayment terms or low or no interest rates. Soft loans are generally treated differently from other debts in divorce.
Courts tend to exclude a soft loan as a marital debt which need to be repaid from matrimonial funds, as these “loans” are unlikely to be repaid in the future, or have little likelihood of enforcement in the case of non-payment.
To increase the chances of a soft loan being recognised it is advisable to create a formal written loan agreement, with clear repayment terms and interest, and evidence of regular repayments.
What are matrimonial debts?
Matrimonial debts are debts incurred during a marriage that are considered joint liabilities of both spouses, regardless of which spouse incurred the debt. These typically include expenses that benefitted the family, such as family holidays, a car loan, or other shared expenses.
Matrimonial debts are usually divided equally during a divorce settlement, with both parties being jointly responsible for repayment.
How are debts detailed in a divorce?
The primary method for detailing debts during divorce is to specify the debts in the Form E – Financial Statement. The Form E is an important document used in divorce proceedings to provide a comprehensive overview of each party’s financial situation.
The Form E requires disclosure of all debts and liabilities, including:
- Mortgages
- Loans
- Credit card balances
- Overdrafts
- Hire purchase agreements.
- Any other outstanding debts
- Capital Gains tax liability.
Both sole and joint debts must be listed.
Debts are also included in the Money and Property section of Form D81 which requires both parties to provide details about debts and liabilities at the time of filing the Form D81, not the situation at the time of separation.
The Form D81 is helpful as it provides accurate and up-to-date information about debts, which may have changed since the filing of the Form E.
How does the court treat debts incurred during the marriage?
Section 25 of the Matrimonial Causes Act 1973 outlines the factors that courts in England and Wales must consider when making financial orders in divorce proceedings. Section 25(2)(b) specifically relate to the “financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future“. Existing debts and liabilities are explicitly considered as financial obligations.
Debts and liabilities include mortgages, credit cards, overdrafts, and loans. Joint debts are typically shared equally, while individual debts may be assigned to the spouse who incurred them.
The aim of the court is to achieve a fair outcome by considering debts alongside other relevant factors set out in Section 25 such as the needs of both parties and any children involved.
Does my spouse get half my debt on divorce?
Generally, a personal debt remains the responsibility of the person who took it out. This means that one spouse or civil partner cannot be held legally liable for a debt in divorce incurred solely by the other. This applies to debts such as credit cards, loans, store cards and overdrafts.
Debts incurred for family expenses, or for the benefit of the family during the marriage may, however, be considered joint liabilities in some cases.
During divorce proceedings, a court may consider these debts as shared responsibilities, even if they are in one spouse’s name.
Am I liable for my husband’s debts if we are separated?
The general principle is that a spouse is not liable for the other spouse’s debts incurred after separation. Debts incurred by either spouse post separation will be the responsibility of the person who took it out.
Exceptions may apply if the debt was taken on for family benefit or to maintain joint property.
How can I protect myself against future debt liability?
The best way to protect against potential debt liability incurred after separation is to:
- Formally document any separation in a Separation Agreement.
- Register a Matrimonial Home Rights notice to prevent the sale of the family home.
- Keep detailed records of spending, and agree on how any joint liabilities will be paid.
- Identify all existing individual and joint debts.
- Close any joint credit facilities.
- Open your own bank account and credit card in your name only.
- Inform creditors of the separation or divorce, and request them to freeze joint accounts.
- Check your credit report regularly to ensure there are no significant changes.
- If financially possible, try to pay off joint debts before separating.