How to deal with debt in a divorce
People in debt can get divorced, but will need to agree a plan or make a formal financial settlement to pay off what they owe.
How this responsibility is shared will depend on whether debts run up during marriage are matrimonial – meaning they benefit the couple or a family as a whole – or individual.
‘When divorce becomes inevitable the starting point is to assess all assets and debt, held both jointly and individually,’ says RF a solicitor.
We explain how this works below, including how to know which type of debt falls into each category, and give tips on protecting your assets and your credit rating.
Divorces have fallen to the lowest level in decades, according to the latest official figures, although some experts have suggested the increase in the cost of living could be a factor in couples staying together.
Recent research found one in five divorces could be delayed for financial reasons including income concerns, financial pressures and the cost of going through a divorce itself.
Average household debt including mortgages was £65,395 last December, according to a separate study by The Money Charity.
Meanwhile, there has been a 50 per cent jump in the value of mortgage arrears over the past year, the latest figures from the Bank of England reveal
How is debt divided during a divorce?
The two types of debt accumulated during marriage which are considered during a financial settlement are as follows.
- Matrimonial debt: This refers to assets that have been acquired and utilised to benefit either the couple or the family, irrespective of the name under which the debt is registered, says RF. ‘If it was taken for the mutual benefit of you, your spouse, and any children, such as a renovation of the family home, both you and your spouse are likely to share responsibility for the debt. The starting point is likely to be that this is a shared responsibility, and may well be paid from joint assets. However, your individual circumstances, resources and financial needs – including the needs of any children of the marriage – may alter the position.
- Individual debt: This occurs when one spouse incurs financial obligations for their exclusive needs, says RF ‘Any debt which was originally brought into the marriage by one spouse will also fall under this category, and the responsibility for that debt will usually stay with the same individual.’
Citizens Advice suggests making a list of the things you and your ex-partner own, including personal belongings, cars, money in bank accounts, savings and investments, plus any debts you have, like a bank overdraft, credit card debts or hire purchase agreements.
‘If your debts are shared, you’ll both be responsible for the whole amount – not just your half. This means if your ex-partner stops paying the debt off after you separate, you’ll have to settle the debt by yourself. Even if you and your ex-partner are talking to each other, it’s a good idea to make sure you have a plan for paying off your shared debts. If you’re worried your ex-partner can’t or won’t pay, you should talk to a solicitor.’
What about a mortgage?
Couples are still jointly and individually liable for a mortgage after the separate, according to law firm Rayden.
Lenders will expect repayments regardless of who they are from, although the mortgage could be discharged if the property involved is sold, it explains.
Citizens Advice has information on what to do with a shared home in a relationship split
Including continuing to make repayments, buying out an ex-partner and selling up. ‘What you do with your home depends on what you can both afford to do once you’re living separately, how much value (equity) there is in the home and whether you have any children,’ it says.
Does divorce affect your credit rating?
‘Getting divorced in itself will not directly impact your credit rating,’ says RF. ‘However, your credit ratings will affect each other if you have joint debts.’ She warns that the law will assume that the majority of financial decisions were made on a joint basis during a marriage, from having both names on utility bills, to taking out joint loans, or getting a mortgage.
The debt charity StepChange says if you have joint debts with your partner you will need to repay the full amount yourself if your partner cannot pay.
However, on debts which are not joint you can get a ‘notice of disassociation’.
‘This takes any financial link with your ex-partner off your credit file. Contact one of the credit reference agencies to remove this link,’ it says.
How do you protect your assets during a divorce?
Along with all assets and debts, both you and your spouse’s income, earning capacity and future income needs are assessed during a divorce, says RF.
With this information, a solicitor can advise what potential settlement options may be available, and any possible maintenance claims.
‘Your specialist family law solicitor may also work alongside an independent financial adviser or tax adviser in order to best protect your position,’ she adds.
Although you can get a ‘DIY divorce’ regardless of whether there is debt or not, it’s recommended that you don’t make it final until a financial settlement has been approved by the court. The main reason for this is assets which may benefit a party whilst still married, such as pensions, would be lost if the marriage has ended.
For example, if one party dies after the marriage has ended but before the financial settlement has been approved by the court, the other party loses their status as a widow or widower. In the context of debt, one party may be solely liable for the debt following the death of the other party.
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How we can help
Handling divorce can be a difficult, stressful, daunting and complex business. Not only do both parties need to keep a clear head and get things done correctly, that can be easier said than done if there’s a feeling of hurt, anger or resentment all of which becomes so much harder to deal with if there are children involved.
Here at Logic Wealth Planning we’ve got many year’s professional experience of helping people through the long list of important issues they need to consider when a marriage breaks up, and our aim above all is to make it as stress-free as possible and feel far less like a minefield.
So if you’re in this position, why not meet with us so we can decide how we can help you. A meeting with us will be free of charge and without obligation. Call us now on 0808 123 4321.
Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.