Debts in divorce: debts incurred by a single party

Debts Incurred During a Relationship That Has Broken Down

Adair & Milford [2015] FamCAFC 29

Valuing the property of the parties in the context of proceedings under s 79 of the Family Law Act involves deducting the value of the parties liabilities from the gross value of their assets. Accordingly, issues sometimes arise as to whether certain debts in divorce should be discounted. The decision in Adair & Milford [2015] FamCAFC 29 examines this issue in the context of a tax debt that could have been retired had the party who incurred the debt chosen to do so.

Who Is Responsible for the Debt After Separation?

After a 15 year relationship, the parties’ liabilities exceeded the value of their gross assets. The trial judge ordered that the husband be solely for a tax debt of $419,000 and that the wife receive the net proceeds of sale of the parties’ properties, if any. The husband appealed on the basis that more than half of the tax debt had been incurred during the course of the relationship.

The Full Court dismissed the husband’s appeal. There are no authorities in support of the proposition that a tax debt incurred during the relationship must be treated as a joint matrimonial liability. Further, the facts of the instant case constitute “compelling circumstances” that would justify the court in allocating the debt to the Husband. Upon orders being made, the wife was left with negligible assets and poor economic prospects in comparison to the husband. The husband had a significantly greater earning capacity than the wife, with gross earnings ranging from approximately $320,000-$565,000 per annum. The wife was burdened with substantial liabilities in excess of $250,000 which we incurred during the course of the proceedings. The husband, on the other, had managed to pay for his legal fees from his income.

Additionally, the husband had the capacity to retire his tax debt, but made “a conscious choice not to pay it.” The trial judge found that had the husband been unable to retire his tax debt, as he had alleged, then he would have followed through with the sale of the parties’ real properties in accordance with the agreement they had achieved. After all, had the properties been sold, the husband would have been in a position to retire substantial debt. Instead, he reneged on the agreement he had struck with the wife.

Debts in Divorce: Prudent Borrowing or Recklessness?

Debts in divorce are generally uncontroversial in circumstances where the parties resume their usual economic behaviours. When a party’s debts in divorce reflect a departure from standard of ordinary prudence, however, it may warrant an adjustment in favour of the innocent party. An account of the above, it appears as though a party’s commercially nonsensical decision to refrain retiring substantial debt has a role in determining the allocation liabilities during the relationship under the following circumstances. Namely, the value of the property exceeds the value of the assets otherwise available for division so as to seriously prejudice one of the parties.