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.
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In plenty of family law cases, spouses are actually able to agree on what the percentage division should be, for example, 50/50, 60/40 etc, but then find themselves locked into serious conflict over how that percentage division should actually be achieved. In these conflicts, the point of argument is almost always turns on the question of the value or price at which the asset is to be retained by one spouse or the other.
To assist in the resolution of these types of disputes, the following is a suggested “decision tree” which might be followed:
At the risk of stating the obvious, the items should be valued and then a comparison made between the value asserted by the Husband and the value asserted by the Wife.
Are the competing valuations from each side truly objective, or has one side simply plucked a (ambit/subjective) figure basically out of the air. By objective, we mean that reference has been made to independent evidence of values such as Red Book websites for motor vehicles, Gumtree, eBay or other online/public domain marketing avenues. If one spouse is working off a pure subjective guess then to the extent possible, they should be encouraged to redo the exercise by reference to independent evidence.
If the competing opinions on values are each objective per item 2, then consideration should be made towards jointly engaging an independent valuer. A “joint” valuation is usually not absolutely binding on the parties but it would be hard to argue against it. If a joint engagement of an independent valuer is not possible, then each spouse might consider engaging their own independent valuer with those valuations to then be exchanged and the spouses to thereafter consider “splitting the difference” between the two independent valuers.
Is pulling a “switch a roo” an option? that is simply saying to the other spouse “OK if I say the item I want to keep is worth $5,000.00 and you think it is worth $10,000.00 then you can take the item at $10,000.00 and I will just go an buy myself a replacement item with the cash payout you are paying me for my share of the original item”. When presented with this ultimatum, the spouse pressing the higher value for the item will often say “I don’t want it” and therefore be forced to either drop their assertion as to the value of the item or agree to go to a joint valuation arrangement. This strategy can also be used in the inverse situation however in that case, the spouse seeking to retain the asset would usually be expected to put up much more of a fight.
Is the replacement cost of the item greater than any “over the money” valuation the spouse seeking to retain the item is being asked to accept. If the replacement cost of the item is significantly greater than any “over the money” valuation then the spouse seeking to retain the item could well still be better off financially by accepting the over money payment but this will always be a question of fact and degree.
Can the “over the money” value be traded against any other “over the money” value that could be put against assets the other spouse is seeking to retain.
Under this option, one spouse is asked is to divide all of the relevant assets into two lists which are equal according to value and utility according to that spouse. After that division is done, the other spouse is then bound to choose one of the two lists. By this method, the spouse doing the division will want to be very sure that each list is as balanced and equally valued as possible because they will have no control over which is list is chosen by the other spouse and of course the other spouse then has not option to trade items. The process is quite brutal but in appropriate cases can nonetheless be an effective resolution tool.
Michael Zande is a Queensland Law Society accredited family law specialist with over 25 years experience in the field. He is the principal at Zande Law Solicitors, Suite 7, Norwinn Centre, 15 Discovery Drive, North Lakes. To contact Michael for advice phone 3385 0999.
The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.
Following the breakdown of a marriage or a defacto marital relationship, the separating couple will obviously need to tackle the task of dividing up their assets. With trust and respect running at an all time low and emotional distress often running at an all time high, reaching agreement on these issues often represents a real struggle. For those who just can’t reach an agreement, the Australian Family Court has the power to adjudicate on the dispute and make Orders to divide up the parties assets in a particular way. This process is called a “Property Settlement” but how is it done?
A property settlement dispute in the Family Court is always worked out according to a 5 step process.
Step1- Is it Just and Equitable:The Court must look at how the assets are currently owned/held and determined if it is fair/or unfair to keep them that way.This condition only becomes controversial in rare circumstances and is usually easily satisfied.
Step2- Value the Asset Pool:Here a Judge works out the value of the assets and liabilities available for division.Some important points to note here on this are:
Superannuation entitlements are these days treated as a divisible asset.
Some “annuity” pension entitlements can actually also be valued as being the equivalent to a lump sum capital amount.
Land and buildings are valued on the basis of what a willing but not anxious buyer would pay a willing but not anxious seller and can be valued by a registered valuer or Real Estate Agent in the event of dispute.
The value of businesses is usually determined according to what retaining the business is worth to the owner operator spouse and in the event of dispute can be determined by special valuers called Forensic Accountants.
Furniture is usually valued at garage sale prices.
Traditionally, each spouse was also at this stage given an opportunity to argue for the add back of any asset that was lost or diminished in value due to wasteful behaviour (for example, giving away matrimonial savings after separation to a third party out of spite) by the other spouse.Recent court decisions however, have suggested this process is more appropriately presented as part of Step 3.
Step3 -Assessment of Contributions:Here a Judge looks at both direct and indirect contributions of both a financial and non-financial nature over the entire period of the relationship. Assets contributed by a spouse at the beginning of the relationship or gifted to that spouse through a Will following the death of a relative or from the proceeds of personal injuries claims are all highly relevant and can often significantly impact on the final assessment.At the end of the process, the Judge assesses both spouses’ contributions usually in terms of a percentage against the asset pool determined from step 1, ie: a Judge concludes the proportions to which the husband and wife can be said to have contributed towards the creation of the wealth now available for division between the parties.
Step4- A Judge Looks at Future Financial Needs:Here a Judge is making a qualitative assessment of either the parity or disparity of the Husband’s and Wife’s future financial needs having regard to their respective:
ages;
health;
earning capacity;
ongoing obligations for the support of any infant children.
If a Judge considers there to be parity between the spouses then a Judge usually will not disturb the percentage division achieved from step 2 however, in the case of disparity then a Judge will usually adjust percentage entitlements up or down depending upon whether one spouse is now considered to be more or less financially needy than the other.
Step5- Justice and Equity:Under this step, a Judge is required to step back from the result achieved from steps 1 to 3 and determine if in his/her assessment, that result does adequate justice and equity between the parties.The application of this factor can be technical but two common applications of this step are:
making small adjustments to a percentage entitlement up or down so as to make it possible for a spouse (typically the primary care giver parent) to retain a home in which she/he and the children might reside to avoid displacing the children; and/or
determining the configuration of assets and liabilities to be taken by one spouse or another as their property settlement entitlements, for example, a Judge may conclude that one spouse should retain or receive a much greater share of superannuation dollars as part of their property settlement entitlements so as to deliver to the other spouse a much greater proportion of present day liquidable assets in cases where that spouse is more in need of money now and the other spouse is not.
Once the percentage entitlements are struck, the Court then generally endeavours to give each spouse the opportunity to retain those assets that they seek with either an additional cash payment if those assets total less than that spouse’s percentage entitlement or provision for a cash payment to the other spouse if the assets are more.
If both spouses seek the same asset then the Courts would generally order that the asset be sold with both spouses then at liberty to bid against the open market if they choose.
Michael Zande is a Queensland Law Society accredited family law specialist with over 25 years experience in the field. He is the principal at Zande Law Solicitors, Suite 7, Norwinn Centre, 15 Discovery Drive, North Lakes.To contact Michael for advice phone 3385 0999.
The information in this article is merely a guide and is not a full explanation of the law.This firm cannot take responsibility for any action readers take based on this information.When making decisions that could affect your legal rights, please contact us for professional advice.
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When asked for advice from a young women set to break off an engagement about any obligation to return the engagement ring, Hollywood socialite Zsa Zsa Gabor once famously said “of course you should return the ring darling – but make sure you keep za stone!”
Questions about inclusion or exclusion of jewellery in the asset division exercise at the end of a relationship, do not come up that often, but when they do it tends to create a lot of heat! If the jewellery is included, the holder will have to pay the giver a proportion of the item’s value to keep it. If excluded, the money originally spent on the item by the giver is lost.
The law for separating married couples is different to those who break off the relationship at the engagement stage.
The Federal Family Court resolves disputes for married couples. Cases over the last 20 years on the subject have been inconsistent, but generally can be grouped into three broad categories.
Big ticket items only – under this approach, the Courts have only dealt with assets of “significant” value such as real estate, businesses, share portfolios and the like. In each judgement the Courts have ignored the smaller “chattel” items such as furniture, motor vehicles and jewellery determining that the person in possession of these items should simply keep it as their own property with no cash payment required.
All in – in these cases the Courts have applied a literal interpretation of the Family Law Act which says that if the item is capable of being sold or traded for value, then it is a divisible asset and should be counted.
Gift -v- Investment – here the Courts have ruled that without clear evidence that the item was purchased by the parties with the intention of being retained as an investment for ultimate resale, the item should be classified as a gift and consequently excluded from the asset division exercise.
Which approach is correct? Technically, the “all in” approach is probably the most correct, but the most recent decisions on the subject have favoured the “gift -v- investment” approach.
Couples who never get past the engagement, must take their disputes for jewellery to the State Courts. Thus far, there appears to have been no reported decision from any Court on the subject however, if it did come up, it is likely the Courts would apply a legal principle called the “presumption of advancement” which is a close relative of the “gift -v- investment” approach referred to above and effectively applies the same test.
The information in this article is merely a guide and is not a full explanation of the law. This firm cannot take responsibility for any action readers take based on this information. When making decisions that could affect your legal rights, please contact us for professional advice.