Marriage is a commitment to your partner to stand by each other through all circumstances for the rest of your life. Managing your finances jointly as a couple can be challenging, particularly when your financial situation is not great and either of you carries significant debts as well. Australia is among the nations with the highest proportion of household debt to income, which means that high levels of debt are quite common for households in Australia.
So, what happens if you or your partner defaults on a loan? Are you responsible for your spouse’s debt? Are you responsible for your spouse’s debts if they die? In this post, we will explain different scenarios in which you are legally responsible for your spouse’s debts.
When are you responsible for your spouse’s debts?
You will be responsible for paying your spouse’s debts in the following situations:
1. You signed as a co-signer or guarantor
If you signed as a co-signer or guarantor on the loan agreement for your spouse or someone else, you are legally responsible for repaying the debt in case the borrower defaults. The fact that you signed the agreement means that lenders can transfer the unpaid debt to you if the primary applicant fails to repay the loan.
2. You have a joint account with your spouse
If you have a joint bank or credit account with your spouse, you will both be jointly responsible for the debt incurred on the account, irrespective of who incurred the debt. This is because the funds in the bank account are accessible to both of you, and the responsibility for paying the debt is also shared by both of you. However, you will not be responsible for your partner’s debt if the debt agreement is signed by your partner alone.
3. You signed up for a loan for your spouse in your name
You will be responsible for your partner’s debts if you have signed up for a loan for your spouse using your details. If your spouse defaults on a loan payment, the creditor will contact you to pay the amount. Also, the default will be recorded in your credit file because the loan has legally been extended to you.
How can you check if you are a guarantor or joint account holder?
Ideally, you should read the document carefully before signing it so that you do not entangle yourself in a difficult situation. However, if you don’t remember whether you are a co-signer, guarantor, or joint account holder in a loan agreement and the lender has contacted you for missed repayments, you need to confirm with the lender as to whose signature the account bears.
If your partner defaults on the loan and the lender reaches you to repay the missed payments, it could mean that you are somehow involved in the loan agreement. The simplest way to find out whether you have any loans in your name is to check your credit report to see what accounts are appearing on it. Additionally, you can request a copy of the loan agreement from the lender to confirm your status in the loan agreement as a guarantor, co-signer, or joint credit account holder. If the copy of the loan agreement does not establish your role, you will then have no legal liability for the debt.
Are you responsible for your spouse’s debt if they die?
In the event of your partner’s demise, you will only be responsible for their debt if the debt was held jointly. This means that any joint assets you hold with the deceased may be sold to pay off the debt. In contrast, if the debt was solely in the name of your deceased partner, it will be paid out from the assets of the deceased’s estate.
If the debt taken by your deceased partner was secured, the lender may repossess the asset to cover the debt. And if some debt still remains outstanding, it will be waived off. Some banks have bereavement policies that you can use to manage your deceased partner’s credit card debt. However, remember that you are not responsible for your partner’s debt they accumulated before your marriage.
What if you want to help your partner pay their debt?
There could be situations when you aren’t legally responsible for your spouse’s debts, but you might want to help your partner in paying off their debt. To do so, you can either transfer their debt in your name, become a guarantor or co-signer of your partner, or pay the defaulted loan of your partner.
What happens if you are separated?
Making a prenuptial agreement before marriage can be an uncomfortable task for you and your partner, but it can help you amicably divide your assets and liabilities if you decide to separate or end the marriage. Prenups are legally binding and enforceable under Section 90B of the Family Law Act 1975. However, in the absence of any prenup agreement between the couple, the court has the authority to decide on the distribution of assets and debts under the Family Law Act 1975. The courts also have the authority to annul a prenuptial agreement if it believes that the agreement is not in accordance with the requirements of the law.
When you tie the knot with someone, you have to decide how you will manage your finances, including debts and assets. You can decide to take on your spouse’s debts, but the law is quite clear about the responsibility of each partner with respect to debts. If the debt is solely in the name of your spouse, they will be responsible for it. However, if you are a co-signer or guarantor of your spouse, or hold a joint bank account or credit account with your spouse, you will also be responsible for your spouse’s debt.