Family Law explained: What happens to unsettled debts during divorce?

When couples divorce, much of the focus understandably falls on what will happen to important assets such as the family home, savings, investments and pensions.

However, what happens to any outstanding debts can be just as important a factor when reaching a financial settlement.

Mortgages, loans, credit cards, overdrafts and other financial liabilities can significantly affect the overall financial position of both parties – and these must all be carefully addressed as part of the divorce process.

In England and Wales, family courts will consider debts alongside individuals’ assets when determining what constitutes a ‘fair’ financial settlement.

For this reason, it’s critical to understand how debts are treated – as well as who remains responsible for them and what practical steps should be taken in response – to help avoid costly mistakes and reduce financial uncertainty during an already challenging time for both parties.

Why debts matter in divorce

A financial settlement is not simply about dividing property between a separating couple: the court will also consider what they owe as part of the equation.

This means that all debts and liabilities also need to be disclosed as part of the financial disclosure process in order to give a complete picture of the family’s financial situation.

Common examples of debts that may need to be considered include:

• Mortgages and secured loans
• Credit card balances
• Personal loans
• Joint overdrafts
• Vehicle finance agreements
• Tax liabilities
• Business debts
• Any other outstanding financial obligations

The existence of significant debts can affect how assets are divided and may influence the overall outcome of a financial settlement.

How do divorce courts approach personal debts?

Financial settlements in England and Wales are governed by the Matrimonial Causes Act 1973.

When dealing with finances, the court has a wide discretion to achieve a fair outcome based on the circumstances of the case, considering both assets and liabilities as part of its final verdict.

It’s important to note that there is currently no fixed formula for dividing debts. Instead, the court will examine various factors such as:

• The financial needs of each party
• Their respective incomes and earning capacities
• The welfare of any dependent children
• The standard of living enjoyed during the marriage
• The contributions made by each party
• The overall assets and liabilities available to the family

The objective is not necessarily to divide debts equally, but to reach a fair and workable financial outcome.

Joint debts vs individual debts: what you need to know

One of the most important distinctions in how a debt will be dealt with in divorce is whether it is held jointly between both partners or attributable to one person’s sole name.

Joint debts

Joint debts are liabilities taken out in both parties’ names, for example:

• Joint mortgages
• Joint bank loans
• Joint credit cards
• Joint overdrafts

In most cases of joint debt, both parties remain legally responsible for the full sum – regardless of any agreement reached during the divorce. This is because creditors are not bound by the terms of a divorce settlement.

For instance, if a court order states that one spouse is responsible for paying a joint loan, the lender can still pursue the other spouse if repayments are not maintained.

The other spouse may then have to seek enforcement of the court order against their former partner.

Individual debts

Debts held solely by one party going through a divorce will usually remain that person’s legal responsibility. However, the family court could still take those debts into account when deciding how assets should be divided.

The court will often consider:

• Why the debt was incurred
• Whether it benefited the family as a whole
• When it arose
• Whether it was accumulated before, during or after the marriage

A debt that was incurred for family purposes may be treated differently from one accumulated for purely personal reasons.

The financial disclosure process

Before a financial settlement can be properly negotiated or determined, both parties are expected to provide full and frank disclosure of their finances – including details of all outstanding debts and liabilities.

Relevant information may include:

• Current account balances
• Copies of loan agreements
• Credit card statements
• Mortgage redemption figures
• Information relating to business borrowing
• Tax debts and liabilities

Failing to disclose debts accurately and honestly can lead to delays, disputes and – in some circumstances – the reopening of financial settlements down the line if/when new information comes to light.

Full transparency is therefore essential to ensuring a fair and timely outcome for all involved.

Reaching an agreement outside of court

Many couples are able to resolve financial issues, including debts, through negotiation, solicitor-led discussions or mediation services.

Where an agreement is reached without outside input, it will typically need incorporating into a consent order and approved by the court to make it legally binding.

A well-drafted agreement may address:

• Responsibility for joint debts
• Whether debts should be repaid before assets are divided
• Refinancing arrangements
• Whether property should be sold to clear liabilities
• Any indemnities between the parties

Resolving these aspects of the separation early and amicably can help minimise future disputes and provide greater financial certainty.

What happens if you can’t reach an agreement?

Where an agreement cannot be reached, either party can apply to the court for a financial remedy order.

Here, the court will consider the entire financial picture – including both assets and liabilities – before deciding how the financial resources should be allocated. Once again, debts will not be considered in isolation but as part of the overall fairness equation.

This may result in:

• Certain assets being sold to repay debts
• One party receiving a greater share of assets because they are taking on more liabilities
• Maintenance arrangements being adjusted to reflect financial obligations
• Other financial orders designed to achieve a fair outcome

Debts and divorce: key action points

Whether you’re considering or actively pursuing a divorce, it’s always advisable to get ahead of any potential debt-related issues that could arise as far as possible.

Typical action points include:

Check your credit position

If you have joint financial commitments, it’s sensible to obtain a current credit report and identify all your outstanding liabilities.

This can prevent debts being overlooked during negotiations and minimise disputes throughout the process.

Be proactive with joint accounts

Where possible, consider closing or freezing any joint accounts held with your former partner to prevent additional borrowing while financial matters are being resolved.

Understand that creditors are separate from the divorce

It’s crucial to know that whilst divorce settlements can determine how responsibility should be shared between former spouses, they cannot alter a creditor’s legal rights.

Put simply: if your name remains on a loan, mortgage or credit agreement, you may still be pursued for repayment – no matter what the settlement dictates.

Consider refinancing

If one party intends to retain a property or continue servicing a joint debt, refinancing into a sole name may simplify things going forward and provide greater protection of both parties’ rights.

However, lender approval will likely be required to complete this step.

Think long term

Individuals initiating the divorce process will need to consider not only current debts but also future affordability.

Indeed, a settlement that appears reasonable in the short term may become problematic if monthly repayments become unsustainable once a deal has been agreed.

Should you seek legal advice?

Every family’s financial circumstances and priorities are unique – and so how the courts choose to treat outstanding debts will largely depend on factors such as the nature of the liability, the purpose for which it was incurred, each party’s financial circumstances and the needs of any children.

Seeking personalised legal advice at an early stage can help ensure that debts are properly identified, thoroughly accounted for and addressed within any financial settlement.

With the right guidance, it’s often possible to achieve a fair outcome for all involved – protecting your financial future and providing welcome clarity as you begin the next chapter of your life.

Get in touch

If you’re going through a divorce and have concerns about outstanding debts or financial liabilities, our friendly and experienced Divorce & Family Law team can provide practical advice tailored to your unique circumstances and help you work towards a fair and sustainable financial settlement.

Speak to our specialist solicitors on 03333 058375, or by email via [email protected], for a no-obligation consultation on your needs today. We’re here to help.