What happens to debts in a family law property settlement?
A family law property settlement includes all assets and debts. Debts are deducted from the total assets as at the date of the final orders.
What about debts post-separation?
The asset pool is not calculated at the date of separation but at the date of when parties get final court orders, consent orders or enter into a binding financial agreement. That means debts after separation are included in the property pool.
Are all debts post-separation included in the property pool?
No, if a debt is considered to be unreasonable, illegitimately incurred or not a debt at all, the court will add the value of the debt back into the property pool. When a party takes on the unreasonable debt it is known as dissipating the asset pool.
What is dissipating the asset pool?
Dissipating assets in family law is misusing, lavishing, and/or squandering the asset pool with or without an intention to make sure the other spouse doesn’t get it. It’s called wastage. It’s not uncommon for lawyers to make wastage arguments on behalf of the spouses who are having their share of assets wasted while they wait for a formal property settlement/financial separation to occur. This is why it’s so important to try to finalise your agreements sooner rather than later.
When has the court considered it dissipating the asset pool?
- letting others use assets of charge for free
- debts from a failing business
- gambling debts
- selling an asset and spends the money
- paying legal fees from joint funds
When a party lets others use assets of charge and gets into debt from a failing business
Kowaliw and Kowaliw (1981) FLC 91-092
Facts of the case
The facts of the case are as follows:
- In short, the Husband had lost money by permitting a prospective purchaser of the former matrimonial home (who ended up not purchasing the property), to reside in the home of rent or contribution to outgoings for about a year.
- Additionally, the husband had lost money and had been left with certain liabilities as the result of the failure of the business from which he had derived his income during the majority of the marriage.
The primary issue in this matter is the issue of taking ‘waste, destruction or the dissipation of assets’ into account in a property settlement matter.
In this case, the court held that the husband had “embarked on a course of conduct designed to reduce or minimise the effective value or worth of the matrimonial assets”. The court considered that generally, financial loss incurred during the marriage should be shared between the parties, except where one party has committed an act designed to reduce the assets or where they “acted recklessly, negligently or wantonly with matrimonial assets, the overall effect of which has reduce or minimised their value”.
In this case, Federal Magistrate Judy Ryan best summarised the principles that arise from this case and its line of precedents as follows:
- The principle in Kowaliw is not a fixed code, however, Kowaliw is a useful guideline for dealing with cases involving lost assets or income.
- In cases, such as Kowaliw, whereby waste is involved, there must be a proper reason for adopting a non-Kowaliw approach.
- If the losses had occurred in the course of the pursuit of the objectives of the marriage, then such losses should be shared by the parties although these may not necessarily equally considered.
- The economic consequences of wasted must be dealt with in a just and equitable manner. Therefore, the economic consequences (loss) may be treated as a premature distribution of the asset pool and notionally added back as the asset of the party who had its sole benefit.
- Taking the premature distribution into account in a general way pursuant to s 75(2)(o) and applying the cumulative outcome of the s 79(4) and s 75(2) findings to the small depleted asset pool may then offend the notions of justice and equity per s 79(2).
- Where the asset pool had been seriously depleted it may be that only by giving the premature distribution its full dollar value that justice can be given. The premature distribution is not restricted to post separation transactions.
- Where the monies have been shown to have been reasonably disposed of the notional add back approach should be exception and not the rule.
- Notional adjustments are not limited to wasted assets, even if the precise value is not known.
In short, if the loss does not involve waste, the economic consequences of a significant reduction in the asset pool must be considered.
There are several cases where gambling debts or funds spent gambling have been considered as wastage.
In AB & GB (No. 2)  FMCAfam 402 the Husband received $400,000 in workers compensation and wasted $80,000 to gambling. The parties were on small incomes and could not afford this waste.
What if the gambling is a real problem and existed throughout the marriage and now as a real ongoing issue?
Crampton and Crampton
Facts of the case
The parties had an asset pool of over 1.5 million dollars, the wife had a gambling problem.
The wife on her own admission stated she had lost about 100,000 to her gambling problem. The court found it was probably likely to be 140,000.
The husband argued that the money should be added back to the pool and it was “reckless, negligent and wanton” loss of assets.
The wife argued the husband knew of her issue throughout the marriage, she had made several attempts to get help in the marriage and after separation. The gambling evolved into a full illness where she completely isolated herself. The wife gave psychiatric reports to prove she had a disorder caused by the gambling and the psychiatrist found that the disorder may not improve.
The court found it would not be appropriate to adjust the property assets in this case.
Selling assets and spending the money
It’s often one party will sell assets and spend the money.
Townsend (1994) 18 Fam LR 505: FC
The husband sold a taxi for $148,000 and spent the funds.
The taxi contributed significant income so selling it prematurely was wasteful.
The spending reckless and not reasonable.
The court agreed that it was a premature distribution of joint property and it would be unjust to see it as anything but an add back to the pool.
Reasonably incurred living expenses
The court is generally reluctant to add back assets where the money is spent reasonable for living expenses. Parties are generally entitled to live separately and independently using joint funds. Gallings & Scott (2007) FLC 93-319
Payment of legal fees
While it could be argued this is a reasonable living expense there have been cases where the court thought it appropriate to add back funds spent from joint accounts. Marriage of Farnell
What if a debt considered waste what happens?
It might be appropriate to add the property back to the property pool as if it was never spent or it might be more useful to add it as a contribution under S75(2). It depends on numerous factors as to what the judge or lawyer might argue.
However, it is important to note it is generally quite hard to argue waste, and it is also difficult to add back things that don’t exist. The cases discussed in this article are not the full facts and each case will be examined on its own as to wastage. Therefore you should seek legal advice early if you suspect your spouse might go to sell assets or misuse, many things can be done like caveats and interim distribution orders to avoid the wastage argument altogether.