Post-Divorce Secured Loan Repayment Responsibilities

Separating from your partner can be an emotional rollercoaster and one that can quickly turn acrimonious when disagreements arise over the ownership and responsibility for repaying outstanding debts.

With a recent report by The Money Charity [1] indicating that average household debt in the UK stands at £65,434 as of January 2023, it is easy to see how discussions relating to financial repayments can quickly sour a previously amicable breakup.

In this article, we explore the responsibilities and expectations of individuals involved in a relationship break down.

How is debt assigned in a breakup?

Debt that is in a single name belongs to that individual and they alone are responsible for repaying the debt. The only exceptions would be:

1) Where they can demonstrate that their partner contributed to the level of debt, for example, by spending on a credit card that was in their partner’s name, or;

2) Where they took out a loan on their partner’s behalf because they were able to secure a more favourable rate and can prove that their partner was the person making the repayments, or;

3) Where one party fraudulently took out a loan in their ex partner’s name without their knowledge or approval. In this circumstance, a solicitor may recommend instigating criminal or civil court proceedings to resolve the matter.

Debt that is held in both names, such as a mortgage or other form of loan that is secured against jointly owned assets is the joint responsibility of both parties to resolve.

In this situation, both parties are equally responsible for repaying the full amount of the loan, not only their share. This is known in the eyes of the law as being jointly and severally liable.

A secured loan will be considered a priority debt to resolve in a divorce and consideration will be given to the manner in which repayments had been made prior to the decision being taken to dissolve the relationship.

What is a secured loan?

A secured loan is a loan that is secured against an asset of value. This type of loan is often for a high value, with a long repayment period. The main differentiating factor between a secured loan and any other form of loan is that with a secured loan, the lender is legally entitled to sell the asset against which the loan is secured in the event that the borrower defaults on repayments.

In many instances, couples that are cohabiting will have a secured loan in the form of a mortgage on their property. When they decide to separate, they will need to agree how to repay the debt and there are a number of ways in which this can happen.

1) They could decide to sell the property to pay off the mortgage and divide any profit between them, as agreed at the time at which the mortgage was secured. This is usually a 50/50 split unless circumstances dictate otherwise.

2) One party could, if they had sufficient funds, buy out their ex and retain the property. This would usually require them to take out a new property secured loan (mortgage) solely in their own name. They could compare quotes online to identify the best secured loan to suit their circumstances.

Other secured loans could be held against valuable assets such as vehicles or jewellery, however, this is less common. Again, repaying a secured loan that is held against a joint asset such as a vehicle would require both parties to agree whether to sell the asset to repay the loan or for one to give the other their proportionate value of the asset and to take on full responsibility for repayments. In this instance, the lender would need to satisfy themselves that the individual would be capable of making the repayments and approve a modification to the loan in order for this to occur.

What if the lender won’t allow a joint loan to become the responsibility of a sole individual?

If, during a divorce or separation, one party wishes to buy the other out of their share of a joint asset, they will need to seek permission from the lender in order to do so. The lender will assess the level of risk associated with this change and make their determination based on a number of factors. In the event that they decline the request, there are three options open to the couple.

1) The individual wishing to buy out their ex could apply to a different lender for the amount that is required to pay off the debt in full, and if approved, use this to pay off the entirety of the existing loan and thereby take full ownership and responsibility for the asset. In order to secure the best possible rate, it is recommended that a secured loan comparison is conducted in order to compare a number of offerings and to identify the loan with the most favourable terms.

2) If neither party is able to secure a loan for the necessary value by themselves, they would usually need to sell the asset in order to repay the loan. This situation would mean that neither party would retain the asset but equally would clear the outstanding debt and remove the liability from consideration during divorce proceedings.

3) The party that wishes to retain the asset could seek a loan from family or friends in order to pay off their ex partner’s share of the loan, thereby reducing its outstanding value and increasing the likelihood of them being able to negotiate a transfer into their sole name. If the lender is still dissatisfied that they do not represent a risk, such as if they have a poor credit rating, they may still need to seek a different secured loan with bad credit from a lender with more flexible terms in order to pay off the outstanding balance of the existing loan.

How would a court view a family loan in the event of a separation?

Many couples are loaned money by family when they are starting out, usually to buy or furnish a property. This is often seen as a loan to the couple rather than to the biological relative. In the event of a divorce, this loan could become a contentious topic, as the party that is biologically related to the lender may wish for their ex to retain joint responsibility for repaying it, whilst the ex may not consider it to be their problem as they are leaving the family.

A court will consider a family loan to be a "soft" loan [2] and of lesser priority to repay than a hard loan, such as a secured loan against property which must be repaid to protect the asset and the long-term financial security of both parties. If there is no contractual agreement for repaying the loan, or repayments have never been made, it will be very hard for the lender to prove that the money was indeed loaned, rather than gifted to the couple, and it is likely that any repayments would be made on a goodwill basis rather than enforced through the courts.

In a similar vein, where a family member or friend of one party has acted as a guarantor for a loan taken out by the couple, they will be keen to ensure that this loan is repaid prior to the finalisation of the divorce in order to remove their association with it. However, the courts will not be involved in this process.

What steps can be taken to simplify a separation of finances in a divorce?

If the divorcing couple had held joint bank accounts and assets for the duration of the marriage, the courts will take the view that their assets and debts are mingled, and therefore each party will be equally responsible for repaying outstanding debts and dividing any remaining funds in a fair and mutually satisfactory manner.

Where a couple have held separate bank accounts and maintained assets and debts in their sole names, this is a far simpler situation to resolve. In many cases, couples holding a single joint bank account into which they pay an equal amount on a monthly basis to handle joint financial responsibilities will also be simple to separate. In these situations, creditors will hold a single named individual responsible for repayments while a joint bank account can be used to pay off outstanding joint debts with any remaining balance divided on a 50/50 basis.

What happens if debt is acquired after separation?

Unless there are significant contributing factors, such as vindictive spending by one partner to deliberately reduce the matrimonial pot, debts acquired between separation and divorce may be factored into the overall settlement.

It is therefore recommended that finances are separated as early as possible after the decision is made to divorce in order to safeguard against this situation arising. Money Helper [3], a government-backed financial support organisation, recommends contacting any banks, building societies or lenders with whom a couple has joint debts or assets to inform them of the separation at the earliest opportunity. This is in order to prevent either party from running up further debts or to temporarily freeze or reduce payments in order to avoid impacting either party’s credit ratings while a long-term arrangement for separating their financial affairs is finalised.

Can a court reallocate individual debts?

If one party took out a loan on behalf of their partner, this contract will be between that individual and the lender. A court will not be able to reassign the debt, even if evidence is available to demonstrate that the other party was the one making repayments. If both parties cannot come to a reasonable position on the repayment of such a debt, a court-approved financial order would need to be obtained. This would ensure that all debts were correctly accounted for to prevent disputes from arising in the future.

A spouse who wished to completely disassociate themselves financially from their ex could apply to a credit reference agency for a "notice of dissociation" [4] to be placed upon their credit report, removing the link between themselves and their ex for future financial reporting purposes.

What happens if a separating couple cannot afford to repay their debts?

In a situation where a couple have run up extensive debt and cannot afford to repay it, either together or alone, they would be wise to seek specific and tailored advice from a debt charity such as StepChange [5], which could assess their level of individual and joint debt and provide them with practical solutions to resolve it. This may include approaching individual lenders for repayment holidays, interest rate freezes, or considering alternative approaches such as debt consolidation or bankruptcy.

If one party accepts bankruptcy as a solution to their debt issues, it can have a significant impact on their ex with whom they share a number of financial liabilities as joint debt will not be included in an individual’s bankruptcy. This simply places the full responsibility for repayment onto the other individual.

If one party is less financially secure than the other, a court may order that the less financially secure individual takes out an Individual Voluntary Arrangement (IVA) or sets up a Debt Management Plan (DMP) in order to contribute to joint loan repayments following a divorce or separation. However, the more financially secure individual will be expected to pay a higher amount and will be responsible for the full value of the debt should their ex cease paying their share.

If you are separating from your partner and may need to take out a new loan in order to retain assets that are of value to you, Free Price Compare’s secured loan calculator will help you to find the most favourable loan to suit your individual circumstances.

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References

• [1] themoneycharity.org.uk
• [2] www.themoneypages.com
• [3] www.trustonline.org.uk
• [4] www.stepchange.org