How are liabilities and debts treated by courts in divorce?

In a divorce, the courts consider all debts acquired during the marriage (marital debts) to be shared by both spouses, regardless of whose name they are under.

However, debts from before the marriage can also be marital debts if the finances were merged during the marriage.

Matrimonial debts 

A matrimonial debt is one that both parties have benefitted from, regardless of whose name the debt is in. This could include, for example, a mortgage, loan for a holiday or a family car or home improvement.

Although lenders normally deem the named spouse to be the one solely responsible for the debt, the court takes a different approach.

Individual debts 

Individual debt benefits just one of the parties and the courts may, in certain circumstances (e.g. gambling debt), disregard these when determining how debts will be shared. The debt itself will have to be examined, and it may even be that a debt in both names is actually for the benefit of just one party. However, generally, the courts will often consider all debts to be matrimonial unless there are compelling reasons to decide otherwise.

With that being said, individual debts such as student loans which were incurred prior to the marriage will usually not form part of the marital pot and instead the individual will be solely liable to pay.

Family loans 

Family loans are common and can raise questions when parties approach a divorce. In trying to resolve financial matters associated with a divorce, it is common to encounter a situation where one party insists that money advanced to them by a parent, other relative, or friend has to be repaid to them and therefore this amount should be kept out of the matrimonial pot. The other party may argue against this, claiming that the monies were in fact a gift and therefore do not require repayment.

In such circumstance, the court determines first whether the advancement of money should be considered a gift or a loan. Usually, where there is evidence of an intention to give, the money will be classified as a gift.

In addition, if the money is classified as a loan, there is a further distinction needed to ascertain whether it is a ‘soft’ loan or ‘hard’ loan. The general guidance is as follows:

The following factors point towards a soft loan:

· Provided by a friend or family member with whom the borrower is on good terms

· The lender is unlikely to want the borrower to suffer hardship

· It is an informal arrangement and not in writing

· No written demand for payment has been made (despite the due date having passed) and there has been a delay in enforcing the obligation

The following factors point towards a hard loan:

· Provided by a commercial lender such as a bank or loan provider

· The terms of the obligation are arranged and feel like a normal commercial agreement

· Penalties will be incurred / litigation if not repaid

· There is no delay in enforcing the loan

If the advancement of money is treated as a a ‘soft’ loan, the court may decide that it is not to be factored in as a liability on divorce. However, if the money transfer is treated as a ‘hard’ loan, it will be noted as a liability or debt that needs to be repaid.

Vardags’ team of top divorce lawyers delivers a bespoke legal service to HNW and UHNW individuals, their families, and businesses.  

If you’re considering or going through a divorce with debts or liabilities involved, we can help. Click below for a free initial consultation with one of our expert divorce solicitors. 

BOOK FREE CONSULTATION