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Dealing With Debt on Separation or Divorce

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One of the many issues to be resolved upon divorce or separation is what happens to the assets of the marriage, such as who retains the house or whether it should be sold.  On the other hand, you also need to decide what happens with any debts of the marriage, whether these are in your joint or sole names.

Even if the debt is not in your name, you could find yourself affected if, for example, the debt is registered against the property in which you live.  Keeping up with loan repayments is vital, since failure to do so could result in a County Court Judgment and your credit card rating being adversely affected. 

Simon Leach, Managing Director of Family Law Group, explains how debts accrued during the marriage can be dealt with when you separate or divorce.  

The Mortgage
The largest debt is likely to be the mortgage upon the family home.  If the property is to be sold, the mortgage will need to be redeemed from the proceeds of sale.  If there is insufficient equity in the property to pay off the mortgage in full, the mortgage company is likely to want to claim the outstanding balance from one or both of you and seek payment from any other assets that you may each own.   The important point to note is that if the mortgage is in joint names, you are jointly responsible for repaying the mortgage and the court cannot prevent the mortgage company from pursuing either of you for any outstanding monies.   

If the property is not going to be sold, the question of who will be responsible for the mortgage payments will arise.  As a mortgage is often raised against a couple’s joint income, you will need to consider whether the mortgage company will agree to a transfer of the mortgage into the name of the person keeping the home.  If not, the court does have the power to transfer the house into one party’s sole name, with the mortgage remaining in joint names.   However, it would generally only do so if the party keeping the family home undertakes (i.e. agrees) to meet the monthly mortgage payments and indemnify (i.e. protect) the other party against any liability for the mortgage payments.   If the mortgage payments are not met, then it is likely that the property will have to be sold.   Either way, the mortgage company would still be able to pursue each party for repayment of any outstanding debt albeit any court would first wish to see the mortgage repaid from the available equity in the house, followed by the party who provided the undertaking and then only if there was insufficient assets to repay the mortgage debt would the court look to the other party for repayment.     

Other Registered Charges
As well as your mortgage, you may have other loans secured against the property.  These would generally be for larger amounts of money such as loans for home improvements.   The lender may have registered a charge on your property in which case you will need to obtain copies of the Register from the Land Registry to confirm details of all charges registered against your property.  The reason for this is that if you want the property to be transferred to you, you will need to know what debts you are taking on.  Business debts may also be charged against the property, although this is quite unusual.   Either way, the formal undertakings described above are likely to be required when you agree with your former spouse as to who has responsibility for the payment of the secured loans.  

Other Unsecured Debt
There may be other unsecured debts, such as credit cards, car finance and bank loans that are in your joint or sole names.  You may feel that you should not be responsible for your ex-spouse’s debts.  If you cannot agree who should be responsible for what debt, the court cannot order a party to pay a debt, nor can it order a transfer of the debt from one party to another.  It can however make a declaration as to who should be responsible for the debt and order one party to assist in the payment of the debt by way of maintenance payments.    

Matrimonial Debt
If the debt was incurred for something you jointly enjoyed during the course of your marriage, such as a holiday or home improvements, the court is likely to look at this as a joint responsibility, irrespective of whose name the debt is registered.  The monthly repayments and the applicable rate of interest will be considered by the court when making a decision as to whether the court will order one party to pay maintenance to assist in the payment of the debt.   However, where there are assets available to repay debt, the court will generally expect such assets to be used to settle any outstanding debts from the marriage.  

Latent Debt
It is important to know the actual value of an asset when dividing the assets.  Where there are assets such as property or a business, the court will want to know the net value of the assets after deduction of any sale expenses and tax, such as Capital Gains Tax.  

Mediation or Collaborative Law
Sorting out your finances upon divorce and separation does not have to lead to bitter recriminations and expensive legal fees.  By engaging in the Mediation or Collaborative Law process, you are far more likely to focus your energies and financial resources on achieving a settlement quickly and for the benefit of the family as a whole.   You will both be directly involved in the negotiations and retain control of the process throughout.   You will also be able to agree aspects of your financial settlement which the court might not be able to order, such as one party taking on sole responsibility for a secured loan, or one of you agreeing to contact a credit company to see if the credit card debt can be transferred to another credit card.    

Whenever there is substantial debt from a marriage, we would always advise you to look at options which are cost effective and non-confrontational.   Otherwise, the likelihood is that by the time your case is finished, your debts will have increased and any assets that you did own at the time of separation may well have been reduced significantly by your respective legal fees.

Simon Leach
Simon Leach, Director

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