Who Pays Debts Incurred After Separation but Before Divorce in Australia?
29/08/2022
When couples build a life together, they often make financial decisions based on trust and convenience. Loans, credit cards, and other liabilities are frequently placed in one partner’s name, even though both parties benefit. This approach can work well during the relationship, but it often causes problems when the relationship ends.
After separation, questions arise about who should take responsibility for debts. A person may find themselves solely liable for a loan that supported the family or discover debts they never knew existed. The lack of clarity can lead to conflict, stress, and difficulty moving forward.
These issues are often made worse by informal agreements. One party may agree to take on a debt, but without a court order, the creditor may still pursue both names. Misunderstandings like these can delay financial recovery and damage credit histories, especially if the situation is not legally resolved.
This article outlines how Australian family law handles debt in separation. It explains what forms part of the property pool, how the court divides liabilities, and what steps can help ensure that debt responsibility is fairly and legally finalised.
What Makes Up the Property Pool in a Financial Settlement?
A property settlement begins by identifying all assets and debts, regardless of whose name they are in. Together, these make up the property pool. The court looks at the total financial picture to determine how it should be fairly divided.
Assets include property, savings, superannuation, vehicles, business interests, and personal items such as jewellery and furniture. Debts cover home loans, car loans, personal loans, credit card balances, tax obligations, and unpaid bills. Each item is assessed for its current value.
The timing of when assets and debts were acquired is also important. Property gained before, during, or even after the relationship may be included if it is connected to the parties’ shared financial life. This ensures that no relevant item is left out when calculating the net asset position.
Including debts in the property pool allows the court to settle all financial ties between the parties in a single process. With the full picture established, the focus shifts to how the pool should be divided fairly.
Types of Assets vs Types of Debts
| Typical Assets | Typical Debts |
| Real estate | Home loans |
| Superannuation | Car loans |
| Vehicles | Personal loans |
| Business interests | Credit card debt |
| Cash | Tax obligations |
| Household items | Utility or unpaid bills |
The next step is to understand how courts assess contributions and personal circumstances when deciding how the property pool should be split.
How Australian Family Law Divides Assets and Debts
Family law uses a four-step process to divide assets and debts after separation. This framework ensures a fair outcome based on both parties’ contributions and future needs.
The first step is to identify and value all assets and debts. Once valued, the debts are subtracted from the assets to determine the net property pool. This includes all property, regardless of whose name it is in.
Next, the court assesses each party’s contributions. These may be financial, such as income or assets brought into the relationship, or non-financial, such as raising children or managing the home.
The third step involves evaluating future needs. The court considers factors like age, health, income potential, and child care responsibilities to ensure both parties have a fair starting point post-separation.
Finally, the court determines a just and equitable division. This does not depend on whose name is on a debt or asset but on who benefitted and what outcome is fair. From here, the focus shifts to how debts in one person’s name are treated.
Who Pays When Debt Is in One Party’s Name?
Debts held in only one party’s name are known as individual debts. While it may seem that the person named on the account is solely responsible, Australian family law takes a broader view. The key consideration is who benefitted from the debt, rather than who signed the loan.
In many relationships, one person may take out a loan or credit card for practical reasons, such as stronger borrowing capacity. The funds, however, are often used for joint purposes. A mortgage in one name may have been used to buy the family home. A credit card might have covered shared living expenses, holidays, or furnishings.
The court looks beyond the paperwork to determine whether the debt should form part of the shared property pool. If the funds were used for the benefit of both parties or the household, the debt will usually be treated as a joint liability, even if it is technically in one name.
When deciding how to allocate responsibility, the court considers:
- Who incurred the debt
- The purpose for which it was taken out
- Who ultimately benefitted from it
- Whether the debt was disclosed and agreed upon
- If the debt supported shared financial goals during the relationship
This practical approach ensures that liability reflects the reality of how the debt was used. However, challenges can arise when creditors are involved, which often requires further steps to manage.
Managing Joint Debts and Creditor Obligations Post-Separation
Joint debts can become complicated after separation. Even if both parties agree that one person will take over a loan, that agreement does not automatically release the other from legal responsibility. The court can reassign debt through a property settlement, but creditors are not bound by this unless there is a formal court order.
It is common for one party to refinance a joint loan into their own name or continue making repayments alone. However, unless the original debt is discharged or transferred by the lender, both names often remain liable. This can lead to ongoing issues if one party defaults, as the lender may pursue the other, regardless of any private or court-mediated agreement.
Creditors operate under the terms of their own contracts. A separation or settlement agreement between parties does not change the legal relationship with the lender. Even a written agreement signed by both parties may not be enough to prevent enforcement action unless the creditor agrees or a court order is obtained.
To reduce risk and protect your financial position, take these steps:
- Seek legal advice before agreeing to take on or transfer debt.
- Refinance or restructure the loan so that it reflects the agreed responsibility.
- Apply for a court order confirming the new arrangement.
- Provide the order to the creditor and request formal recognition.
- Monitor repayments and compliance to avoid unexpected damage to your credit record.
Where debt responsibility remains unclear or contested, the court’s role becomes even more important. Additional challenges may arise when one party accumulates hidden or unnecessary debt before the settlement is finalised.
Hidden, Reckless, or Wasteful Debt
Not all debts are created equally in the eyes of the court. While many liabilities are tied to shared expenses or mutual decisions, others arise from secrecy or poor judgment. In these cases, the court may adjust the property settlement to account for one party’s misconduct or financial carelessness.
Discovering Unknown Debt
It is not uncommon for someone to discover, during separation, that their former partner accumulated debt without their knowledge. This might include gambling losses, secret loans, or personal spending unrelated to the relationship. Australian family law requires full and honest financial disclosure, and failing to reveal a significant debt can carry serious consequences.
The court will consider whether the other party was aware of the debt and whether they benefited from it. If the debt was hidden or unrelated to shared expenses, the court may treat it as that person’s sole responsibility. Evidence such as bank statements, loan contracts, or gambling records may be used to support the claim.
In these circumstances, the debt is often excluded from the shared property pool, or its impact is adjusted so that the innocent party is not unfairly disadvantaged. This ensures the final outcome reflects genuine contributions and transparency.
Reckless Spending or Wastage Before Settlement
Another issue is wasteful conduct. Wastage refers to reckless or irresponsible use of property or credit after separation but before the financial settlement is finalised. This includes racking up unnecessary debt, spending money on extravagant purchases, or selling assets at a loss without justification.
Common examples include one party taking out new loans for personal use, draining joint accounts, or disposing of assets for below market value. These actions reduce the value of the property pool and can unfairly impact the other party’s entitlement.
Where wastage is proven, the court may adjust the division of property to account for the loss. This typically results in the responsible party receiving a smaller share, ensuring that the affected party is not penalised for decisions they did not make.
When debts are mishandled in these ways, legal intervention becomes essential. A formal property settlement helps protect against further risk and provides a clear path forward.
Finalising Debt Responsibility the Right Way
When separating couples face debt in just one name, assumptions about responsibility can lead to costly mistakes. Australian family law does not simply follow the name on the account. Instead, it considers who incurred the debt, who benefitted from it, and what outcome would be fair based on the financial history and needs of both parties.
While parties may reach informal agreements about who will repay which liabilities, these arrangements carry significant risk. Without a court order, creditors are not obliged to honour any private deal. This means a person who has stepped away from a loan may still be pursued for repayment if the named borrower defaults. Such situations can affect credit ratings, financial stability, and the ability to move on after separation.
A legally binding property settlement offers clarity and protection. It confirms who is responsible for each debt, how liabilities should be structured moving forward, and ensures creditors receive formal notice. Where debts have been hidden or misused, the court has tools to address unfairness and restore financial balance.
If you are dealing with debt issues after separation, contact us for tailored advice.