Debt on separation and divorce
When a couple separate, sorting out their financial arrangements is a priority. There is much to be decided including:
- where each is going to live
- does the former joint home have to be sold
- is each party able to be financially independent in the future and, if not
- what support should be paid
- how are any debts to be serviced and paid off.
It is the last of these issues which is covered in this piece.
Who is liable for debts?
During a relationship parties often enter into an agreement to borrow money which makes them both responsible for the repayment of the loan. Under such an agreement there is a “joint and several” liability and the creditor can look to either party for payment.
The most common example of this is a joint mortgage. The mortgage company will ensure that both parties sign the mortgage deed and by doing this each party is responsible for the repayments.
If the parties separate the debt still has to be paid. The mortgage company will usually look to the party who is living in the property to make payment but it has the right to turn to the other party.
The same rules apply to any other debts which were incurred jointly, such as bank loans and hire purchase agreements. In addition, if one party has guaranteed the payments of a loan taken by the other party, the fact that they later separated does not release the guarantor from liability to pay the debt if the person legally liable fails to do so.
In summary, even if the parties, between themselves, agreed that a loan taken in their joint names was to be paid by only one of them, later separation does not automatically excuse the non-paying party from liability if they are legally responsible on the loan agreement.
Can parties agree who is to pay debts?
The short answer to that question is “yes”, the parties can agree on separation that one or other of them will be solely responsible for discharging certain liabilities e.g. a car or bank loan or a hire purchase agreement.
It is, however, very important to emphasise that any agreement does not change the legal ability of the creditor to require either party to repay if both names are on the loan agreement. Take the example of a joint bank loan taken in joint names to buy a car for one of the parties. It can be agreed between them that, after separation, repayment of the loan will be made by the party who will become the owner of the car. If that person fails to make those payments, however, then the bank can still look to the other party for payment.
Similarly, it often happens during the separation process that a jointly owned property is, as part of an overall agreement relating to finances, transferred into the name of just one of the parties. The fact that only one party is then the legal owner does not, so far as the mortgage lender is concerned, relieve the non-owing party from the obligation to pay the mortgage. The lender will not usually look to the non-owning party provided that the other party is paying the mortgage. If the mortgage payments stop, for whatever reason, the mortgage lender is entitled to look to either party.
The only way that the legal liability can cease is if the name of the non-owning party is removed from the mortgage. The mortgage company will usually only agree to this if it is satisfied that the continuing owner can meet the repayments.
Can a credit record be affected by a former partner?
When partners live at the same address and one of them acquires a poor or downgraded credit record, that fact can adversely affect the credit record of the other partner. This can usually be put right in time and more easily so when they have different addresses, but this can be a lengthy process. This can be very difficult for the innocent party, particularly at a time when they are trying to re-establish themselves after the separation.
Are the rules the same for spouses and cohabitants?
So far as the legal liability of the parties to the creditor is concerned, the answer again is “yes”.
In addition it is also possible for parties, whether married or not, to come to an agreement as to which of them is to pay outstanding debts. Remember, however, that any such agreement is not binding on the lender unless the lender agrees to it.
In the case of married parties who separate, the court has the power to adjust the ownership of assets to take account of the fact that one party is responsible for debts. For example, if one party pays all or a large part of the joint debts because the other party has no funds from which to do so immediately, the paying party may well receive a greater share of the total assets to ensure that, taken overall, the distribution is fair.
We encourage and help parties to try to reach agreement as to how their finances are to be adjusted following a separation. The question of how debts are to be paid is just one of the many issues that have to be considered in arriving at a fair conclusion and is usually linked to several other financial aspects. Advice from a solicitor experienced in these issues is strongly recommended in order to avoid unexpected pitfalls.
If you or anyone you know, are affected by the issues raised above and would like more information or some preliminary, confidential advice, please contact one of our experienced experts in our family team by email or telephone.
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