Separating parties are often anxious to know whether they will
become liable for their ex-partner's debts upon separation.
This article discusses sexually transmitted debt and what it means
in the context of family law proceedings.
WHAT IS "SEXUALLY TRANSMITTED DEBT"?
"Sexually transmitted debt" is when you become liable
for your partner's debt as a result of your marital and/or
de-facto relationship, rather than a conscious knowledge or
acceptance of the debt.
WHO IS LIABLE FOR DEBTS UPON RELATIONSHIP BREAKDOWN?
Sexually transmitted debt can arise in a relationship in a
number of contexts, for example, when you provide an "all
monies" mortgage or if you guarantee your partner's
business loan. In the context of family law proceedings it commonly
arises when one party incurs debts during the relationship (for
example by not paying their taxes as and when they are due, by
gambling large sums of money or by unsuccessfully investing in
risky investments like futures or option trading) and the other
party becomes liable for a share of those debts.
In determining property disputes the first step is to identify
and value the parties' assets, liabilities and financial
resources. The net assets capable of division between the parties
are then arrived at by deducting the debts of the parties from the
value of their property.
The general position in Australian family law proceedings is
that in the absence of being able to prove "waste" or
that the debt was not enforced or was unreasonably incurred, then
debts which accrue during the relationship are shared. This is
because marriage is viewed as an economic partnership.
In certain circumstances, this can extend to becoming liable for
your partner's debts even if they were incurred after
separation. This is because debts usually "come off the
top" of the pool of assets prior to deciding how the remaining
assets should be allocated.
Waste is notoriously difficult to prove. It must be a financial
loss resulting from a party's conduct which was designed or
intended to reduce the value of matrimonial assets, or a
party's reckless, negligent or wanton actions which have
effectively reduced the value of matrimonial assets.
Ignorance is no excuse. Sometimes even though you were not in
possession of knowledge to make you sufficiently aware of the other
spouse's behaviour which caused the debt, the court may still
consider the debt reasonable.
WHAT CAN I DO TO PROTECT MYSELF?
It is important to instigate an open dialogue between you and
your spouse and/or de facto (whether you are together, separated,
or at risk of separating) in relation to your joint financial
position so as to avoid being taken by surprise in the unfortunate
event of relationship breakdown. If your partner has incurred large
debts and you do not consider you should be liable for a share of
them, you will need to collect evidence that proves the debt was
that it will never need to be repaid (as is sometimes the case
with loans from family members);
that the other party's actions were reckless, wanton or
that the other party, by their actions, deliberately sought to
reduce the value of the assets capable of being divided when
incurring the debt.
If you are doing a Will, or you are the executor of a deceased estate, consider what taxes and duties could be payable.
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