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    Is your former spouse generating debt?

    Sep 4, 2019 3:37:17 PM

    It is not uncommon for a spouse to accumulate debt following separation. If your spouse is partying it up, spending money on extravagant items, selling investments and increasing their credit card debt, it can make the family law property settlement problematic. This is because all assets and liabilities are included in the pool that is to be divided between the parties, and the value is at the current value, not the value at separation. What can be done about debts incurred post separation?

    Common Types of Debt following Separation

    There are a few common types of debt incurred post separation that could be excluded or have a notionally add back as follows:

    1. Legal expenses;
    2. Sale/Purchase of investments at a loss;
    3. Purchase of luxury items; and
    4. Illegitimate Debts and Caveats.

    It is important to note that we are not considering everyday living expenses, because these expenses are reasonably incurred by both parties.

    Consideration of the Balance Sheet

    After obtaining information of all the assets and liabilities of the spouse, you see on the balance sheet that there are debts that have been incurred post separation. Depending on the reason for the debt, you may argue to exclude the debt from the balance sheet. For example, a personal loan incurred to pay legal expenses may not be considered part of the pool (Chorn & Hopkins (2004) FLC 93-204), and if it is included, there may be an argument that the legal expenses be added back in (explored below).

    Another consideration is whether the spouse has purchased or sold investments or other property since separation at a loss. This can be selling a car below market value to a family member, or recklessly purchasing an investment property which has significantly decreased in value. These actions will reduce the size of the property pool to be divided between the parties, and you may argue that the lost value be added back into the property pool.

    Add backs

    A judge has the discretion to consider whether funds should be, in exceptional circumstances, notionally added back into the property pool due to the actions of a spouse. The Court is required to make an assessment of the reasonableness of the expenditure (M & M [1998] FamCA 42) in regard to the actions of that spouse.

    For example, wonton and reckless expenditure on monies lost on shares and unsuccessful investments (In the Marriage of Omacini (2005) 33 Fam LR 134).

    Is the debt legitimate?

    In many circumstances a spouse attempts to reduce their asset position by generating debts with family and friends. In some circumstances historical loans with family members or friends are legitimate. However in most circumstances it is simply an attempt to circumvent a spouse’s family law claim. Debts should have documentation such as loan agreements and bank statements to show the transfer of money and repayments. 

    Furthermore, it is not uncommon for these debtors to register caveats over property in a Family Law property pool to ‘protect’ the interest in these debts. However, a caveatable interest for a debt only arises in particular circumstances, and not withstanding the caveat has been lodged it may be a simple process to remove it where it is clear that the debt, whether real or not, does not give rise to a caveatable interest.

    Take Home

    If a spouse is accumulating debts following separation, those debts should be considered carefully. The court is particularly concerned with any property settlement being just and equitable and attempts by a spouse to circumvent their spouse’s family law entitlement have been thwarted time and time again. As such there are many ways these alleged debts can be considered to ensure a fair outcome.

    if you have further questions, please contact Andrea Harold at aharrold@franklaw.com.au.

    This is not legal advice. 

    Photo by Carrie Johnson from Pexels

    Andrea Harrold

    Written by Andrea Harrold