Sexually Transmitted Debt

New relationships often carry the excitement and anticipation of discovering what hopefully will be rich mix of many common interests and values combined with admirable differences. However sometimes, along with all of the positives, comes the shock discovery that the new man or woman is riddled with debt! Whether the new partner’s financial troubles are sourced from a one-off past misadventure or a healthy (and ongoing) appetite for overspending, resolution of the debt situation will obviously become a shared problem if the relationship is to continue.

For the partner who is asset positive, there is an understandable trepidation, about how they might protect themselves for the other partner’s liabilities, particularly if the relationship was to eventually breakdown and the couple choose to separate.

Here there is a combination of good and bad news.

The good news, is that the mere formation of a relationship (even a formal marriage) does not automatically result in the debts of one spouse becoming a joint liability between the couple. Consequently even if the couple stay together, the creditors of one spouse cannot pursue the other spouse’s assets for repayment of the debts^*. Also, if the couple do separate at some time after the original debts are paid off, the past asset negative position of the debt ridden spouse may result in the other spouse (who was originally asset positive) being able to retain a much greater share of the present day asset pool.

The bad news however is that if the couple were to separate before the asset negative spouse’s liabilities have been paid off and the couple have subsequently acquired some other assets, the Family Law System prohibits the division of the other assets in any way that might result in creditors being left unpaid. Consequently, if one spouse puts $50,000.00 of his/her own cash into the purchase of a jointly owned home but the other spouse still has a personal credit card debt of $20,000.00, the  Court might order the credit card to be paid off out of the $50,000.00, with the result that the debt riddled spouse leaves the relationship debt free and the asset positive spouse leaves $20,000.00 the poorer! Orders of this sort are not automatic and there are other ways to defend against the threat   but it is definitely a risk to bear in mind for anyone taking on a partner with heavy liabilities in tow.

^{* this assumes the asset positive partner has not subsequently refinanced  the debt into joint names or given a personal guarantee for the debt.}