Debts After Separation and Divorce in Australia

The Current Framework

Sections 79 (married) and 90SM (de facto) of the Family Law Act 1975 (Cth), as amended with effect from 10 June 2025, govern property assessment. The relevant assessment identifies the parties' legal and equitable interests and liabilities, considers their contributions, and considers their current and future circumstances through the matters set out in sections 79(5) and 90SM(5). The Court is also required to consider the economic effect of family violence where relevant, and must be satisfied that any order is just and equitable in the whole of the circumstances.

Liabilities are considered together with assets across those questions. There is no rule that debts are split equally on separation or divorce, no automatic add-backs, and no formula that produces a fixed answer. The Court's task is holistic: it identifies the property pool (including liabilities), assesses contributions of all kinds (financial, non-financial, parenting and homemaker), considers current and future circumstances, and then asks whether the proposed orders are just and equitable when the assessment is considered as a whole.

A debt is not, in every case, simply a negative number added to the asset pool. Depending on its enforceability, its likelihood of being called on, whether it is secured, whether it is contingent, and whether one party has the practical ability to service it, a liability may be included at face value, discounted, treated separately as a financial-resource or cashflow issue, or excluded from the pool with reasons.

Creditor Rights and Family-Law Allocation

Two questions are commonly confused. The first is: to whom is the debt owed, and on what terms? That question is governed by the contract between the borrower (or guarantor) and the creditor, and by the applicable consumer-credit, banking, taxation or other law. The second is: how should the debt be treated between the former spouses in the property settlement? That question is governed by the family-law framework in sections 79 and 90SM.

A private agreement or an ordinary inter-party family-law order allocates responsibility between the former spouses but does not, by itself, release a borrower or guarantor from a creditor that is not a party. Practical release from a lender is usually achieved by refinance, sale, novation, discharge or a negotiated release. In defined circumstances the Court may make orders that affect a third party where an available statutory basis exists and procedural fairness is afforded to the third party; the availability and scope of such orders is fact-specific and determined on the material before the Court.

Between separation and settlement, servicing arrangements for existing debts still need to be addressed. Missed payments on joint accounts, revolving facilities or secured lending affect both parties' credit positions with credit reporting bodies and can trigger default interest, enforcement notices under the National Credit Code where applicable, or acceleration under the loan contract. Interim arrangements — whether agreed in writing between the parties, contained in interim orders, or reflected in formal undertakings — are commonly used to avoid irretrievable steps while the substantive settlement is being finalised.

How Different Debts Are Treated

Joint debts. Joint borrowers remain jointly and severally liable to the creditor for the full amount. Missed payments can be reported against each borrower's credit position, default interest can accrue, and secured lenders retain enforcement rights. Between the former spouses, allocation is part of the wider family-law assessment.

Sole-name debts. A debt in one party's name is that party's contractual liability to the creditor. It may still be relevant to the family-law analysis where the borrowed funds were used for family purposes or for a jointly-benefiting venture, or where the debt was incurred in the context of a joint household budget from which both parties drew benefit.

Secured lending. A mortgagee's rights against the borrower and the mortgaged property are unaffected by separation. Orders between the parties often deal with refinance, sale, discharge, retention or substitution of security within a defined period, with a sale or default fallback. Where the property is jointly held but only one party is the borrower under a refinance, the non-borrower's equitable interest must be dealt with either by transfer, sale or an interest recognised in the order.

Personal guarantees. A guarantee is a separate contract between the guarantor and the lender. A guarantor cannot be released merely by agreement with the other spouse. Release usually requires the lender's consent, repayment of the underlying debt, substitution of security or a negotiated release. Where a guarantee is called on after the settlement, the guarantor's recovery position depends on the indemnity granted (if any) in the family-law order, on subrogation to the lender's rights against the principal debtor, and on the principal debtor's solvency at the relevant time.

Tax debts. A tax assessment is enforceable against the taxpayer to whom it is issued (an individual, a company or a trustee, as the case may be). Family-law orders may allocate tax responsibility between the former spouses and provide for indemnities, but do not bind the Australian Taxation Office. A company's obligations for PAYG withholding, net GST and superannuation guarantee charge may separately engage a director's personal exposure under the director penalty regime in Division 269 of Schedule 1 to the Taxation Administration Act 1953 (Cth) where the conditions of that regime are met. Individual tax positions under objection or subject to a Part IVC proceeding may need to be quantified conservatively until resolved.

HELP-related liabilities. HELP-related obligations (including HECS-HELP and other study loans) are personal income-contingent debts repaid through the tax system. They are not ordinarily apportioned between the spouses, but their existence and quantum can still be relevant to cashflow and to the current and future circumstances considered under sections 79(5) and 90SM(5).

Business and entity debts. The debtor is identified by the entity form, the terms of the relevant contract, the applicable statute and any security, guarantee or indemnity arrangements. A company debt is owed by the company; another person is bound only where they have separately contracted (for example, by guarantee or indemnity) or where a statute imposes personal exposure (as with director penalty notices for certain unpaid tax and superannuation guarantee amounts, insolvent trading under section 588G of the Corporations Act 2001 (Cth) where its conditions are met, or personal liability that arises on liquidation for certain unpaid amounts). A partnership debt is owed by the partners on the partnership terms and the relevant State or Territory partnership legislation; the incidence of liability between partners depends on the partnership agreement, the nature of the debt and the applicable law. A trustee's debt is owed by the trustee, ordinarily with a right of indemnity out of trust assets where the trust deed and the circumstances allow; where the indemnity is impaired or the trust is insolvent, the trustee's personal position, any successor trustee's exposure and the beneficiaries' positions may all be relevant. Loan accounts between spouses and entities they control (shareholder loans, director loan accounts, unpaid present entitlements, beneficiary loan accounts) sit on either side of the balance sheet and often require accounting analysis before any family-law treatment can be settled.

Family advances. Whether a family advance is a genuine enforceable loan, a gift, a conditional gift or a debt asserted only after separation depends on written documents, repayment terms, security, payment history, demands, accounting treatment, tax returns and the timing of any documents created after separation. The claimed liability may be recognised, valued conservatively, discounted or excluded on the evidence.

Contingent and disputed liabilities. Guarantees called on contingent events, tax positions under objection, disputed lease liabilities and other contingent exposures may be considered at less than face value, treated as financial-resource issues, or dealt with by conditional or reserved orders where the framework of the case allows.

Post-Separation Borrowing

Debts incurred after separation are neither automatically excluded nor automatically included. Their treatment depends on the purpose of the borrowing, the use of the funds, whether the other party benefited, whether the borrowing was necessary and the parties' overall financial position. Borrowing to preserve a jointly owned asset (for example, paying a mortgage in arrears) is typically viewed differently from discretionary post-separation borrowing for personal expenditure. Where the borrowing has an economic effect that engages the family-violence provisions, that effect is a matter the Court is required to consider.

Draws on redraw or offset facilities, use of joint credit cards after separation, cash advances, and borrowing secured by joint property can each affect the other party's position and the property pool. Where a party has caused a material and unexplained reduction in the pool by conduct after separation (waste, dissipation or the incurring of unjustified liabilities), the Court may address that conduct through its assessment of contributions and current and future circumstances rather than through a mechanical add-back.

Refinance, Novation and Release from Joint Lending

For many separating couples the largest liability is secured lending over the former matrimonial home or an investment property. Splitting responsibility as between the former spouses does not, of itself, remove either from the loan contract. To achieve actual release, one of the following steps is usually needed:

• a refinance in which the retaining party (with or without a co-borrower) obtains a new facility that discharges the existing debt in full;
• a novation or substitution of borrower agreed by the existing lender, releasing the departing party from the original loan and the associated guarantees;
• sale of the security property with the proceeds applied first to discharge of the mortgage and any priority interests, and the balance distributed under the settlement; or
• a negotiated release from the lender, sometimes on terms including partial repayment, cash collateral, or substituted security.

Family-law orders commonly build in a defined period within which refinance or sale is to occur, with a default mechanism (typically an order for sale on specified terms) if the retaining party cannot achieve refinance within that period. Serviceability testing under prudential lending standards, the retaining party's income, existing credit reporting and any adverse listings arising during the separation period will all influence whether refinance is achievable and on what terms.

Economic Effect of Family Violence

Since the amendments taking effect on 10 June 2025, the Court is required to consider the economic effect of family violence on the parties' contributions and on their current and future circumstances. In the debts context, this may be relevant where a party has been coerced into signing loan documents or guarantees, where one party has controlled the household finances and directed borrowing without the other's informed involvement, where credit has been taken out in a party's name without their knowledge, or where a pattern of economic abuse has affected a party's capacity to service debt after separation. Evidence on these questions may come from bank records, application documents, communications, protection-order material and independent statements, in addition to the parties' own evidence.

Debts and Binding Financial Agreements

Part VIIIA (for married parties) and Part VIIIAB (for de facto parties) of the Family Law Act 1975 (Cth) permit binding financial agreements dealing with property and financial resources, including liabilities. Provided the strict formal requirements — independent legal advice for each party, signed statements of advice, and correct execution — are satisfied, such agreements can allocate responsibility for identified debts between the parties. They cannot, however, bind a creditor that is not a party. The Court retains a discretionary power under sections 90K and 90UM to set an agreement aside where a listed ground (including fraud, unconscionable conduct, a material change in circumstances relating to a child, or impracticability) is established. Where debts are addressed by financial agreement, the interaction between the private allocation and the underlying creditor position still needs to be worked through.

Servicing Debts During the Settlement Period

Between separation and finalisation, one or both parties usually continues to service joint or individually-held debts. Whether that servicing is treated as a contribution, as a cost of preserving the asset that secures the debt, as a matter of spousal maintenance, or as neutral will depend on the source of the funds, the use of the underlying asset, and the parties' broader arrangements. Where one party occupies a jointly-owned home and the other services the mortgage, or vice versa, the Court will typically consider whether an adjustment reflecting occupation value, exclusive use or contributions is appropriate.

Practical steps commonly taken during the settlement period include: closing joint credit facilities to new drawings while retaining them for existing balances; formally notifying lenders that no further joint drawings are authorised without both signatures; reviewing offset and redraw arrangements; agreeing interim payment arrangements in writing; and, where needed, obtaining short interim orders that preserve the position pending final settlement. Each of these steps interacts with the underlying loan contract and the lender's risk appetite, and should be checked against the actual facility documents.

Third-Party Orders and Bankruptcy

A creditor that is not a party to the proceeding is generally not bound by orders made between the former spouses. Orders that affect a third party require an available statutory basis, procedural fairness for the third party and evidence sufficient to support the order sought.

Bankruptcy materially changes the analysis. The trustee in bankruptcy may be joined to the family-law proceeding under rule 3.10 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021. Provisions in the Bankruptcy Act 1966 (Cth) and section 106B of the Family Law Act 1975 (Cth) may apply. Some debts may be released on discharge; joint and several liability, secured debts, guarantees and certain other obligations may survive. Property that has vested in the trustee under section 58 of the Bankruptcy Act stands outside the control of the bankrupt spouse, and questions about the vesting of after-acquired property, exempt property and the trustee's ability to disclaim onerous property may arise. Where a former spouse becomes bankrupt or is approaching insolvency, the family-law and insolvency questions typically need to be worked through together.

Where a small-business restructuring, a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth), a debt agreement under Part IX, or a voluntary administration or deed of company arrangement under Part 5.3A of the Corporations Act 2001 (Cth) is in prospect, the interaction with the family-law proceeding is often material. Moratoria on enforcement, the treatment of contingent claims, the position of secured creditors, and the ranking of family-law property claims relative to unsecured creditors can each affect timing and outcome. In matters involving small or family businesses, the intersection with directors' duties, insolvent-trading exposure and tax liabilities warrants coordinated attention.

Section 79A and section 90SN of the Family Law Act permit variation or setting aside of property orders in defined circumstances, including where a miscarriage of justice has occurred (for example by non-disclosure), where it is impracticable for the order to be carried out, where a party has defaulted and it is just and equitable, or where exceptional circumstances relating to the care of a child have arisen. These provisions can be relevant where a debt-related premise of the original order (such as the recoverability of a receivable, the enforceability of a claimed liability, or the ability to refinance) turns out to be materially incorrect.

Disclosure and Evidence

Chapter 6 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 imposes a continuing duty of full and frank disclosure. That duty extends to all liabilities, including sole-name debts, guarantees, contingent exposures, tax positions, business-related obligations, loan accounts, family advances and disputed claims. Non-disclosure can produce adverse inferences, costs orders, orders under section 106B affecting transactions designed to defeat a claim, and orders setting aside prior agreements.

Disclosure obligations extend to the entities that a party controls or has effective control over. The parties' positions as directors, shareholders, partners, trustees, beneficiaries or appointors of trusts often need to be documented, together with the corresponding accounting records, tax returns, loan statements and constituent documents.

Valuation and Documentary Evidence

Because liabilities are often disputed on both enforceability and quantum, the documentary record matters. For a claimed loan, that record ordinarily includes the loan document, records of advance, contemporaneous accounting entries, statements of account, evidence of demands and repayments, and any security given. For a guarantee, the guarantee document, the underlying facility, any lender certificates and the demand documents are typically central. For a tax liability, the assessments, objections, private rulings and correspondence with the Australian Taxation Office are relevant.

Where the value of a liability is contingent or uncertain, a range of approaches may be used, including expert accounting evidence, discounted-cashflow analysis of servicing costs, and, where appropriate, treatment of the exposure as a matter to be considered in the parties' current and future circumstances rather than as a fixed pool item.

Where multiple entities are engaged (for example, a trading company, a discretionary trust with a corporate trustee, a self-managed superannuation fund and one or more real property holdings), reconciling the audited or reviewed accounts with the parties' personal tax returns, division 7A loan positions, unpaid present entitlements and any related-party guarantees is often a substantial exercise in its own right. A clear account of who owes what to whom — and on what terms — is a prerequisite to a durable family-law settlement.

Where a claimed liability has not been reduced to a formal demand, the evidence about whether and when it is likely to be enforced is important. A liability that is unlikely to be pursued may still be recognised, but at a discount that reflects that likelihood. A liability that is likely to be enforced within the settlement period may need to be recognised at face value with a corresponding provision in the order for its discharge.

Time Limits

Under section 44 of the Family Law Act 1975 (Cth), a married party's application for property settlement or spousal maintenance must generally be filed within 12 months of the divorce order taking effect. De facto financial cause applications are generally subject to a two-year limit from the end of the de facto relationship. An application outside those periods requires the Court's leave under section 44(3) (post-divorce) or section 44(6) (de facto), which the Court may grant where the statutory conditions — including hardship to a party or a child, or (for spousal maintenance) inability to support oneself without an income-tested pension, allowance or benefit — are established on the evidence. Missed limits can materially affect the options available.

Where a debt or an entity involves a specific limitation period (for example, in relation to a contract, a guarantee, a tax assessment or a claim in equity), that period is independent of the family-law time limits and requires separate attention.

Frequently Asked Questions

Related reading: Property Settlement After Separation, Mortgage and Household Expenses After Separation and Former Spouse Bankrupt.

How Parke Lawyers Can Help

Parke Lawyers' Family Law team acts for separating spouses and de facto partners across Australia on property settlement, including the treatment of joint and sole debts, tax liabilities, guarantees and third-party financial exposure under sections 79 and 90SM as amended with effect from 10 June 2025. Engage us early so the balance sheet, disclosure and proposed treatment of liabilities can be framed properly from the outset.