One of the things that I am asked almost every time I meet a new client is who pays the outstanding debts when we separate? Those debts might be an overdraft, a car loan, credit card debt or even debt to a family member.
The answer depends firstly upon whether the client is married or merely cohabiting with their partner.
If the client is cohabiting, then the person in whose name the debt has been taken out must remain responsible for payment of the outstanding amount.
They have legal responsibility for that debt. Of course it is always open to separating parties to agree to both contribute to repayment of the debt, but in the case of a dispute then there is no easy mechanism to seek contribution from the other person whose name is not on the debt.
If the debt was taken out for say a car which the person whose name is not on the debt has kept following separation, or say for a joint holiday where there is evidence it was agreed both would pay – then it may be that a civil claim could be bought in the small claims court against the other cohabitee.
If the client is married, then the position is different. Whilst the person whose name is on the debt remains legally responsible for repayment, ie the lender can only look to that person for repayment, the divorce court can order the other spouse to make payment.
A court would look at various factors before deciding who should pay the debt (irrespective of whose name is on the debt). The purpose of the loan will be the first consideration ie was it spending on the family, or personal expenditure, was it for a joint asset or a holiday? The court will consider who retains the asset to which the loan relates if any. A main consideration will be which party has sufficient income to repay the loan if there is not sufficient spare capital to do so on settlement. In short the court can order one spouse to repay a loan in the other spouse’s name when dealing with a financial settlement on divorce. This can also be included within an agreed settlement.
One word of caution however and that is the court will often consider a debt to a family member as a “soft debt” which is unlikely to be pursued and will disregard that in the financial settlement. If you are a relative lending monies always have documentation drawn up (and if possible a charge placed against property) to prove that you intend the loan to be repaid and you will have more chance of having that loan taken seriously by a court should the need arise.
We are now able to meet with clients at the Tanner Business Centre in Greenfield
Angela Moores is a Partner in the Family Law team at SAS Daniels and a Resolution Accredited Specialist.
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