Adjustment of Debt in Family Law Property Divisions– Can one party end up with the debts of both parties to the Marriage - Effect on third parties?

06/08/2019

The Family Court can order the division of matrimonial property and this can include debts.  Section 79 of the Family Law Act 1975 gives the Court power to alter the interests of the parties with respect to the property of the parties to the marriage and this can and usually will require debts to be taken into account. 

What is a debt?

A debt is an amount of money due and payable by one person (or both) to another.  Debts can be joint or individual.  An individual debt is a debt that only one person is liable to pay.  A joint debt is a debt that more than one person is liable to pay.  There are usually joint debts in a family property matter.  The mortgage secured over the matrimonial home (if owned by both parties) will most likely be a joint debt.  A tax debt may be joint debt in some circumstances.  A debt for which your spouse or partner is liable to pay can affect the size of the property pool available for division. 

Just and Equitable

In exercising its powers and its discretion to make property orders under the Family Law Act the Court will not make an order unless it is satisfied that in all the circumstances, it is just and equitable to make the order.  A just and equitable outcome may require the Court to adjust, rearrange or apportion individual or joint debts. 

The Family Court has the power to make Orders in relation to debts and the exercise of this power may affect the rights and obligations of persons other than the parties.  It can affect the rights of third parties.

Section 90AE of the Family Law Act

This section provides that a Court may make an order under Section 79 of the Act (the Section allowing the Court to make orders dividing the property of the parties to the marriage) that would bind a third party and this third party can be a creditor (i.e. someone who is not a party to the marriage).

Changing Responsibilities for Payment of Debts 

This section provides that in property division proceedings (Section 79 proceedings) the Court may make any of the following orders:

(a)      An order directed to a creditor of the parties to a marriage to substitute one party (instead of both parties) in relation to that debt in other words, one party becomes the only party liable to pay that debt. 

(b)      An order directed to a creditor to one party to a marriage to substitute the other party or both parties to the marriage in relation to a debt in other words, debts can be swapped or shared. 

(c)       An order directed to a creditor of the parties to a marriage that the parties be liable for different proportions of the same debt i.e. both have to pay but in different amounts. 

(d)      An order directed to a Director of a company or to a company to register the transfer of shares from one party of the marriage to the other party.  In other words the party receiving the shares gets an interest in that company where they previously did not have an interest in the company. 

Protecting Third Party Interests

The Court may make an order under this section that alters the rights and liabilities of the property interest of a third party. 

There are limitations in relation to the Courts power to make such orders and the powers are discretionary:

  • The power must be exercised with caution. 
  • There needs to be a sufficient connection of the order to the division of property between the parties to the marriage. 
  • There must be procedural fairness (notice) must be provided to the third party whose rights will be effected by the existence of the proceedings and the orders sought. 
  • The Order must be just and equitable. 
  • There should not be a more appropriate Order available. 

The Court needs to take into account:

  • The taxation consequences of its Orders.
  • Capacity of a person to pay a debt for which they may become responsible to pay. 
  • The capacity of the third party to comply. 

Tax Liability is a Debt that can be Re-arranged

In the recent decision of Tammalous the High Court considered the decision of the Full Family Court of Australia and it appears to be the case that the Court’s capacity to effectively re-arrange liability for debt is wide and can be allied even though the debt is a taxation debt and an amount owning to the Crown.

If you are about to enter property/financial settlement negotiations with your spouse or partner and you are concerned as to a significant debt owed by your spouse or partner and how it will impact on your financial/property settlement, please contact Richard Watson Senior Family Law Solicitor or Shereen Da Gloria his Personal Assistant to discuss your concerns and seek appropriate advice to put your mind at rest.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 9221 6011.

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