Debt and Divorce (England and Wales)
What defines debt?
You, like many, might be wondering ‘what happens to debt in divorce?’. Debt refers to a sum of money that is owed or due to another individual or institution. There are many different types of debt and it might surprise you to know that debt is included when you come to look at your divorce financial settlement.
*** Note: All references to divorce below, apply equally to dissolution.**
We’ve written this blog to help you better understand debt, and how it relates to divorce and your finances post-separation. As always, should you need any further bespoke advice, you can speak to one of our experts or you can email us here.
Before I explain how debt relates to divorce, here are some common types of debt which might be factored into your divorce financial settlement…
Common types of debt (individual and joint):
- Credit card debt
- Payday loan
- Bank loan
- Student loan
- A loan from a family member or friend (also referred to as a ‘soft loan’)
- HMRC debt or a defined amount of money to be paid to HMRC in the immediate future
- Car finance
- Store cards
** *Note: any business debt is included within your divorce financial settlement!
What is a financial settlement in divorce?
The divorce financial settlement often refers to legalising what has been agreed in terms of the financial side of separating. When a couple divorces or dissolves their civil partnership, they need to decide how they plan on splitting their finances as well as organising any childcare arrangements. Any agreed financial arrangements can be legalised through a financial remedy order. If both people are in agreement on what they want to do, then you can apply for a consent order.
What is a consent order?
A consent order is a document that explains to the court how you have agreed to split your finances when you separate. A consent order is only possible when you are both in agreement on how to split your finances and you’ll both need to sign the paperwork to confirm this to the court. There is no set formula for a financial split but you can read our agreement checker to see what factors the court considers when deciding whether to approve your agreement.
When you submit a consent order to court, you also have to send a completed ‘Statement of Information’ - this document gives some background to the judge (your ages, when you got married, where you both plan to live after the divorce), as well as a snapshot of your current finances. It’s a legal requirement to declare all of your assets and debts at the point you complete the form.
This snapshot needs to include the following (where applicable to you):
- Equity in property
- Assets and debts (including business assets)
- Investments, savings and shares
You cannot apply for a consent order, until you are at the decree nisi stage of the divorce, or conditional order stage of the dissolution . You can only have a consent order on divorce/dissolution and the decree nisi or conditional order proves that a judge has given you consent to divorce. Even if you are both in agreement, it is for a judge to decide whether they can legally approve your consent order. A judge may come back with queries for you to respond to jointly or request that you both attend a short hearing to speak to you directly. For more information about consent orders, read our guide here.
What constitutes a matrimonial debt in terms of a divorce?
When considering your finances on divorce, regardless of whether an asset or debt is in joint names or individual names, everything is considered part of the ‘marriage pot’. Therefore, if your ex has a debt in their sole name, it will be deducted from the overall marital assets, even though the debt is not in joint names and regardless of whether it was incurred before/during your marriage or post-separation. Some couples decide to settle debts between them as part of the financial settlement and in this case, you will need to provide details to the court on how you intend to repay the debt and the deadline for doing so in your consent order.
Similarly, any assets obtained prior to, during or after marriage are deemed matrimonial assets, until a split is defined to the court and a clean-break is ordered via the consent order. If you’re confused about your financial situation and your divorce, you can book to speak to an amicable expert or email us here.
What about the debt incurred after we separated?
If the debt is in joint names, you are likely to be jointly and severally liable (e.g. for a joint mortgage), so best to agree on how you’ll continue to pay the debt after separation. If it doesn’t get paid on time, it will affect everyone’s credit record.
If you’re not paying off a joint debt before your divorce, a consent order becomes really important to make it legally binding as to who will make the payments and the non-payer can be indemnified for the future.
If you’re going to keep a joint mortgage, a Mesher Order may be the way forward as this enables you to delay the sale of the property, and define when it will be sold in the future, as well as what will happen with the proceeds. You can read more about this here.
If you’re planning to move the mortgage on a property to someone’s sole name, you need to either apply for a new mortgage or request permission from your incumbent provider to move the mortgage to a sole name. For more information about properties and divorce, you can read our guide here.
If a future debt is in your ex’s sole name, you’re not liable for it but it will be deducted from the marital pot of assets if you haven’t legalised your financial split through a consent order.
Many people think that if they separate and sort out their finances informally at the time of separation, any future debt incurred by their ex would be separate from them. As explained above, whilst you wouldn’t be liable for the debt in someone else’s name, without a consent order ending all future claims, you are still financially tied together. If you have separated several years ago, sorted your finances out at the time, and only now choose to get a divorce and submit a consent order, the court will base their decision on your finances as they are now , not at the time you split. This is demonstrated to the court in the snapshot you provide them via a full financial disclosure which is attached to your consent order.
Will this change with the introduction of no-fault divorce?
No-fault divorce is scheduled to be introduced in England and Wales on the 6th of April 2022 . There will be several changes to divorce and dissolution proceedings with the introduction of no-fault divorce. You can see a full breakdown of these here. However, the process for financial remedy orders will remain the same, so you will still need to complete a full financial disclosure, including any debt.
amicable tips for debt and divorce:
**1. Write out a list of everything you have and owe 2. Plan a post-separation budget with your children as the primary consideration (if you have them) 3. Prioritise which debts to pay off first 4. Make sure you both share the burden (or look at your income and available capital and share the burden accordingly I.e. not necessarily a 50:50 split) 5. Reach out and ask if you’re not sure **
How is marital debt divided?
This will depend on what kind of debt it is, and your individual circumstances such as income and available capital.
What happens to joint loans in a divorce?
You are both liable for your joint loans and will have to decide based on your financial split how you wish to divvy these out.
How is credit card debt divided in a divorce?
As this is an individual debt, only the indebted is liable, however, the debt is deducted from the marital pot.