Tough Economic Times and Relationship Debts

The global credit crunch is hitting New Zealand hard. Commentators predict that house prices will continue to fall this year, resulting in increasing numbers of couples who owe the bank more than their houses are worth.

And money troubles are one of the leading causes of strife in domestic relationships.

So, how are debts dealt with when couples split up, and what can you do to protect yourself from acquiring responsibility for debts incurred by your partner?

Relationship Debts are to be Shared Equally

One of the primary purposes of the Property (Relationships) Act 1976 is to recognise the equal contribution of spouses/partners to their relationship. This leads to the general rule that both parties should share equally in the value of the relationship assets if they split up. But equally, both parties must share in the “relationship debts”.

The value of the relationship property available for division is calculated by:

• ascertaining the total value of the relationship property; and then
• deducting from that total any relationship debts.

In the event of a divvy-up, the name of the party in whose name the debt is recorded will benefit from having the debt classified as a relationship debt – that means they take only half the responsibility for it. If it is classified as a personal debt, half its amount will not come out of their partner’s share of the relationship property.

What are Relationship Debts?

Determining just what are “relationship debts” is critical. They are defined in the Act as debts incurred:

• by the spouses or partners jointly (eg the mortgage over the family home);
• in the course of a common enterprise carried on by the partners together or with anyone else (eg the overdraft on the family business);
• for the purpose of acquiring, improving or maintaining relationship property (eg loan taken out to buy new furniture);
• for the benefit of both spouses or partners in the course of managing the affairs of the household (eg credit card debt for grocery purchases); and
• for the purpose of bringing up any child of the relationship (eg loan taken out for boarding school fees).

Grey Areas

The examples given above are, quite obviously, relationship debts. But the classification can be far from easy. What about:

• student loans incurred during the period of the relationship? – likely to be a personal debt unless the loan was used to pay for the rent and groceries – in which case it might be classified as part relationship debt and part personal debt;
• tax liability on income earned prior to separation but payable after separation – likely to be a relationship debt;
• mortgage raised on the family home to provide funding for a business in which the husband was the sole shareholder and director – this would depend on whether the loan was truly a “joint” loan and whether the business was a common enterprise between the husband and wife;
• loan to wife which she used to fund her own business, before the relationship started, profits from which she has largely re-invested in the business – likely to be a personal debt, but could be debatable if profits from the business have also been used for household expenses and improvements.

Protect Yourself

Throughout your relationship, both parties should make every effort to know what the situation is with their own and their partner’s financial affairs. Do not just sign loan documents, company resolutions and trust documents without fully understanding what you are doing and why. You can end up taking on debts for which, in reality, you should have no responsibility. If you have split up or are thinking of doing so, take legal advice as soon as possible. Take copies of all possibly relevant documentation you can such as company accounts, bank statements, trust deeds and resolutions and loan documentation. This will help your lawyer advise you on your entitlements, including whether any debts should be classified as relationship or personal debts. Think about the status of all debts carefully, and take legal advice on that – do not just agree they are relationship debts if you do not want them to come out of your relationship property entitlements.

Under the Act, the Court can compensate a partner who has been hard done by through the payment of personal debts out of relationship property (eg Bruce had a gambling debt which was satisfied out of his and Amanda’s joint savings). The Court can make an order increasing Amanda’s share in the relationship property, or order that part of Bruce’s separate property is treated as relationship property for division.

It is also possible to contract out of the provisions of the Act by agreement. To be valid, a contracting out agreement has to be in writing and signed by the parties. A solicitor for each party must certify that he/she has explained the effects and implications of the agreement to their client. Contracting out agreements can be useful in defining what the position is with property and debts before, or at an early stage of a relationship. This can minimise arguments and make for a much easier division if separation does occur. You can specify that particular debts are personal, not relationship property debts (and vice versa). Ideally, such agreements should be reviewed regularly, say every five years, to take into account changes of circumstances (such as children being born) and changes in assets and liability positions of each party.

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Last updated: 5 February 2009

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.