Until debt tear us apart printed red brick wall at daytime

Allocating Debt After Your Separation

By Sarah Moon

6 June 2023

Keeping finances separate is increasingly common in New Zealand relationships.  When this occurs, it is not unusual to discover hidden assets, structures or debts at separation.  As New Zealand relationship property legislation is “no-fault”, generally misbehaviour or financial infidelity during the relationship is not relevant to the division so it is important to be aware of whether you will find yourself liable for debts you did not even know about.

Under the Property (Relationships) Act 1976 (PRA), debts are classified as either being “separate” or “relationship” debts. The person owing the debt has the onus to show that the debt is a relationship debt.

Relationship debts

Proving a debt is a relationship debt requires one of the statutory classifications to be met. Section 20 of the PRA defines a “relationship debt” as a debt incurred:

  • jointly; or
  • in the course of a common enterprise carried out by the couple (with or without another person); or
  • to acquire, improve or maintain relationship property; or
  • for the benefit of the couple in managing the affairs of the household; or
  • for the purpose of bringing up any child (provided the child lives with the couple – the child does not need to be a child of the relationship).

Debts to acquire, improve or maintain relationship property

If finance was used to acquire, improve or maintain any relationship property – it will be classified as relationship property.

If separate property becomes relationship property during the relationship – then any finance relating to that separate property will also become relationship property.  An example of this is vehicle finance.  As vehicles used in the relationship become relationship property under the PRA, any finance associated with that vehicle also would become a relationship debt. This applies regardless of the value of the vehicle compared with the debt.

Debts for the benefit of the couple in managing the affairs of the household / bringing up children

The Courts have tended to take a liberal approach in classifying debts incurred under these headings.  Debts that have been caught include:

  • a hidden loan between sisters – when a couple was having financial difficulties and the husband refused to discuss finances and money was needed for a new baby;
  • legal fees associated with a partner’s separation from an earlier partner when those fees were incurred during the relationship;
  • the “living costs” component of a student loan taken out during the relationship;
  • a hidden income tax liability that one partner has incurred without the knowledge of the other (however – the classification of this debt was proportionate to the income bought into the relationship); and
  • lavish and expensive renovation costs for a property held by a trust, when the renovation was driven by the couple’s desire to have a suitable home environment, rather than as a capital improvement pursued by the trust.

Separate debts

Debts that do not fall within one of the categories of “relationship debts” are classified as separate debts.  The liability for the debt is not shared and stays with the partner who legally owes the debt.

Classic examples of separate debts are student loans (course fees) or debts secured over separate property (such as a mortgage over an investment property acquired before the relationship ).

Paying off a partner’s debt

It is also important to note that compensation can be awarded under the PRA when a partner has paid off their partner’s personal debt during the course of a relationship.  This is increasingly common where, for example, a partner has agreed to combined income (relationship property) paying off a student loan. 

How can I protect myself?

Whether you have experienced financial infidelity, or are simply concerned about your partner’s spending habits, the best way to protect yourself is first making sure that you are aware of all debts that you and your partner owe.

If you consider that it is fair that a particular debt should not fall under the classification provided by the PRA then you can enter into a Contracting Out Agreement. Contracting Out Agreements can be entered into at any stage of your relationship – whether you have been together for six months or sixty years and will be upheld by the Courts provided they are not seriously unjust or are found to have been made to defeat creditors.

Talk to us

For more information or professional advice on this topic please contact Sarah Moon or another member of our relationship property team.

Headed for divorce? Who gets the farm?

By Sarah Thompson

4 March 2021

Untangling relationship property at the end of a relationship can be tricky. This is especially the case when family farms are involved – with their unique structures of companies, partnerships and trusts and the reality that family life is often centred around the farm.

There are many aspects of relationship property legislation that are not very well understood by the public. It is not uncommon for separated partners to be surprised that property that they considered to be their separate property is in fact relationship property.

For example, even if the farm was owned pre-relationship and only the farmer works it, their spouse may still have a claim to the increase in the value of the farm. The crucial question is whether a part of that increase was due to the non-farmer spouse. As many farms in our region have seen significant growth in value in the last few decades, this is an important risk to consider.  

A 2009 decision called Rose v Rose remains the leading case in answering this question.  The facts are relatively common.  The farmer in question farmed in partnership with his father and brother – a structure established well before his marriage to Mrs Rose.  Mrs Rose worked off the farm, earning a wage which allowed Mr Rose to keep the farm afloat, as it was heavily mortgaged.  She also looked after the home.

The dispute went all the way to the Supreme Court and ultimately Mrs Rose was awarded 40% of the increase in the value of the farm – a substantial amount as the farm’s value had increased from $300,000 at the start of the relationship to $1.5 million at the end. The Court agreed with the wife’s argument that without her income, the farm would have been in jeopardy, so the Court was satisfied that at least some of the increase in the value of the farm was due to her actions. The Court also recognised that as the homemaker, Mrs Rose had freed up her husband to spend long hours on the farm.

The best advice we can give to a farming client considering separation is to engage a specialist relationship property lawyer to give you advice on your own situation.  Depending on the facts, the farm could be subject to a relationship property claim – even if structures designed to avoid such claims are used.

Similarly, if your farming family is getting larger with a new relationship – the best way to protect the farm’s legacy is through an agreement contracting out of the default provisions of the Property (Relationships) Act 1976.  It is an excellent insurance policy against a complicated, expensive and time-consuming process should things not work out.

Talk to us

For more information or professional advice on this topic please contact Sarah Thompson today.

Relationship Property Laws Remain the Same for Now

So, if you separate you may have to share the equity in your home or business when you never intended to do so.

Last year, Parliament kicked to touch the highly anticipated recommendations from the Law Commission proposing to change our relationship property laws. The recommendations will be looked at again once Parliament has received the benefit of the Law Commission’s review of our law relating to succession. Given the large overlap between these two areas of law that seems appropriate, however in my view, the changes recommended by the Law Commission were very sound and could have been adopted immediately.

For example, the Law Commission recommended that the current law, which provides for equal sharing of the family home upon separation regardless of whether or not it was owned by one party before the commencement of the relationship, be changed. The recommendation was to classify only the increase in value of the home as relationship property. Most people would see that as fair.

While the recommendations may yet become law, as it stands now, if you own your own home outright but have your new partner move in with you, after three years (subject to certain exceptions) you must share the equity in your home if you separate. Most people would see that as unfair, particularly when the relationship is for a relatively short length of time.

Given that the status quo remains the same for now, it is important to remember that is perfectly acceptable for parties to enter into a contract which records their agreement – having first received the benefit of independent legal advice – to share differently, in the event of their separation, than what the law would otherwise provide.

These agreements are commonly called “contracting out” agreements – this is because the parties agree, by contract, to a different regime. Such agreements are appropriate in and for many circumstances including the protection of the family home and business assets acquired before the relationship and can be done at any time in a relationship.

The record values of property coupled with the fact that people are living longer and entering into second or third relationships and want to ensure their children are provided for means that there is good reason to understand what the law would provide in the event of separation. Ownership of the family home by a trust will not necessarily protect it either.

It is perfectly acceptable for parties to agree to an outcome that is different to what the law would otherwise provide. As noted above, many people would consider the law as it relates to the family home to be unfair. Litigation is expensive and not predictable, particularly in areas where Judges have discretion over whether or not, and to what extent, a division other than the usual 50/50 is appropriate.

Careful consideration of what would or should happen in the event of separation can avoid an unfair result and provide certainty for both partners and their families.

Talk to us

For expert advice on relationship property and separation matters contact Andrea Halloran today.

Frequently Asked Questions on Separation

1. What is the legal process for getting a divorce?

To formally end your marriage, you have to get an order of the Court dissolving it – a dissolution. The only ground for a dissolution in New Zealand is that you have been separated (living apart) for two years. If you both agree to get a dissolution, you can make a joint application. If you cannot agree, either one of you can make an application. The application needs to be made to your local Family Court.

The process is generally easy to follow and you generally don’t need legal assistance as all the information is publically available on the Family Court website – see http://www.justice.govt.nz/family/separation-divorce/apply-for-a-divorce/.

2. What about our property?

There is a presumption of equal sharing for all property acquired during the course of the marriage. There are lots of exceptions to this presumption, however the Courts generally strive to give effect to this unless there are exceptional circumstances justifying otherwise. You and your partner may agree on a division of property. In order for that agreement to be final and binding it is best to have that recorded in writing and signed off by you after receiving independent legal advice about the effects and implications of the agreement. If you cannot agree on division of your property then you can make an application to your local Family Court for orders. You generally do need a lawyer for this as the process can be complicated.

3. How do I protect my children’s financial rights when we split up?

Parties generally agree about the financial provisions that need to be made for their children. If one party is a recipient of a state benefit then the other party will automatically have their income assessed for child support.

4. How can I stop my partner taking all the money from our joint accounts?

If you are concerned about property disappearing you should immediately talk to your lawyer who can advise you what steps can be taken. If the property is money held in a bank account also talk immediately to your bank. If the accounts are joint there is nothing stopping you from withdrawing half/the whole sum and placing the funds elsewhere for safekeeping.

5. My Spouse and I are separating and he’s moving out. Is he allowed to take property from our house to his new house?

Not without your consent in writing or unless the removal relates to an emergency. The Family Court can grant orders that give the other party furniture to equip another household. It is best if at all possible to reach agreement on this property.

6. My partner of 10 years wants to leave. We have lived all this time in a house he owned before we started living together. Since I moved in, I have been paying half of the mortgage and bills and we’ve redecorated together and bought furniture and appliances. What is my legal position?

If you reside in the family home then it is relationship property. If you are in a qualifying relationship (living together in the nature of marriage for three years or more) there is a presumption that you will have a 50% interest in the house that is jointly occupied (subject to ownership by a trust, third party or another entity). If the house is on a property owned for business purposes before the relationship commenced it might be restricted to just the home and not the business.

7. Who has to pay for the household and children’s expenses when one person moves out?

Generally both parties are liable for outgoings that relate to the relationship property, for instance, rates and mortgages. Living expenses are another story. The remaining occupant can be liable to the other party for “occupation rent” – a market rent to the party that is not in occupation. Children’s expenses should be met by both parties but this can only really be enforced through child support or maintenance.

8. My spouse wants to leave and take our children. Do I have any rights to stop them doing that?

Yes. Where children reside is a guardianship decision. Who has the day to day care of the child is a matter that has to be determined with reference to the best interests of that child. Applications can be brought to the Court in such circumstances.

9. I am about to split up with my second spouse whom I’ve been with for over 15 years. We have lots of investments in our joint names although they contributed more than I did to those investments. What am I entitled to?

If they are joint investments that were obtained during the relationship then they are relationship property and there is a presumption that you will have a 50% interest in them.

10. I have earned considerably more than my second spouse of 10 years and have paid the mortgage and all living costs for all that time. If we separate, can I protect my children (of my first marriage) against losing assets to my second wife?

The best way to protect assets earned before the commencement of a relationship is by having an agreement which records how property is to be divided in the event of separation. This is called a Contracting Out agreement. Trusts are also commonly used however recent Court cases in New Zealand indicate that using trusts may not be as secure as previously thought. A Contracting Out agreement is best entered into at the start of the relationship but can be entered into between spouses at any time prior to their separation.

11. How do I protect assets that were given to me by my family?

Generally any family heirlooms (such as jewellery, furniture etc.) will remain separate property. If you place an inheritance of money into a joint bank account you risk converting that property into relationship property and therefore may be required to share that property with your partner in the event of separation. A Contracting Out agreement is often used to ensure that any inheritances are still retained as separate property in the event of separation.

12. I feel very emotional about our break-up and I worry that I will roll over and not ask for all I’m entitled to and then regret it in the future. Do lawyers help with that kind of advice as well?

Your lawyer has the duty to act in your best interests and will advise you strongly against it if you are considered to be compromising your legal position. However it is ultimately up to you what you do. A lawyer’s role is to focus on the legal aspects of your separation. The emotional aspects are best dealt with by a counsellor. Your lawyer is usually able to refer you to counselling options available in your local area.

13. I wish to leave my partner and her children – we’ve been living together for five years. Do I have to provide for her children once I leave?

Assuming that the children are the children of your partner from a previous relationship you would have no obligation to pay child support in respect to the children. However if your partner is unable to meet her reasonable financial needs she may seek maintenance from you, which indirectly will be used to provide for her children.

14. My husband wants to leave and he insists on selling our house. Can I be forced out of the family home?

No. Your husband will not be able to sell the home without your consent or a Court order. If the title is in his sole name, a notice of interest can be lodged against the title which would prevent the sale without reference to you first.

15. What is a separation agreement?

A separation agreement is an agreement that is entered into by parties who have been in a relationship but have separated and who have agreed on a division of their property. A separation agreement is signed off by the parties and their lawyers. The lawyer for each party has to certify that before signing the agreement they advised their client about the effects and implications of the agreement. Once signed, the separation agreement is binding in all circumstances and can only be overturned in exceptional circumstances. A valid separation agreement avoids the situation of having the Court divide property for parties rather than the parties themselves deciding what is appropriate with the benefit of advice from their lawyers.

Talk to us

Contact Andrea Halloran today to discuss how we can assist you.

New RMA Compliance Unit and Best Practice Guidelines

I may not have a crystal ball, but the prediction I made in my last column – that the Government would seek greater enforcement of environmental standards has come true. Minister for the Environment David Parker has announced the establishment of a new unit to oversee compliance with the Resource Management Act (RMA) and to “improve consistency, effectiveness and transparency of council enforcement of RMA rules and decisions”. In short, we can expect more enforcement action to be taken across the country.

This seemed inevitable to me because reporting from councils had shown a very diverse approach to compliance, monitoring and the enforcement of environmental standards across the board. For example, it was recently reported that only one council gave no notice for effluent inspections. Some gave notice in writing within a relatively short time frame, whereas others asked the farmer to make an appointment with their officer. It also revealed that only some councils appeared to be willing and able to back up the monitoring with enforcement action. A lack of resources to do this is a significant issue.

It’s clear the new government intends to change that and back up its commitment to prioritise climate change measures and improve water quality with the introduction of this new unit. It has been allocated operational funding of $3.1 million over the next four years.

In addition, the Ministry for the Environment has just released (7 July 2018) best practice guidelines for compliance, monitoring and enforcement, available at www.mfe.govt.nz. The primary audience for these guidelines is council staff and representatives however, if an approach is inconsistent with those guidelines, it will, in my view, be up to the council concerned to show good and strong reasons to justify a different take.

There is benefit in standardising the approach to be taken to RMA compliance, monitoring and enforcement. What is the point in having rules or bottom lines if they are not to be enforced? Why should the same rule be enforced by one council and not another? Why should all the good work farmers do for the environment be ruined by one renegade operator who always seems to “get away with it”?

While the proof will be in the pudding, the new unit, along with these guidelines, should mean that councils will be better resourced to take action where necessary, and will be required to take that action in a principled and consistent way. As a lawyer, standardisation in this area should mean it will be easier to provide more accurate advice as to the likely consequences if land or water activities do not comply with the required standards.

Talk to us

Contact our Resource Management Team today to discuss how we can assist you.

Can You Trust a Trust to Protect Your Assets

If your assets are in a trust they might not be as safe from creditors or relationship break-ups as you might think. The Courts are prepared to set aside or go around trust structures if it is justified.

Trust structures can be overturned in a number of different ways. These include if the trust has not been run properly; if it is really the “alter ego” of an individual or if the trust was really never intended to operate as a trust. If the trust structure is overturned then any benefits will be lost. For example, if the trust was established with a view to protecting assets from creditors’ claims, once overturned, those assets would be exposed. If the trust was established to hold and protect your family home from any subsequent relationships, the home will no longer be classified as “trust property” but classified as “relationship property” and therefore subject to Property (Relationships) Act, which generally presumes that both partners should share equally in the family home if their relationship is three years or more.

In the relationship property context, the Court of Appeal has recently ruled that trustees of a trust held the increase in value of a property not for the beneficiaries of the trust but for the benefit of the couple who had worked on the property. That meant it was “relationship property” not trust property and was to be shared equally. This is seen as a somewhat novel way to address efforts by a partner who was not a beneficiary of a trust and who otherwise would be unable to claim against any relationship property. The decision must be viewed against the legislative backdrop of the Property (Relationships) Act whereby all contributions, not just monetary, are considered.

When thinking about ways to protect your assets, consider a contracting out agreement instead of, or possibly as well as, a trust. Contracting out agreements allow partners to say what provisions of the Property (Relationships) Act won’t apply to their property interests in the event they separate or go into bankruptcy. Provided each person gets independent legal advice as to the effects and implications of the agreement they are hard to overturn as a challenger generally has to prove it was void due to a technicality or that it would give rise to serious injustice. For a creditor to overturn a contracting out agreement, they would generally have to prove that the agreement was entered into in order to defeat creditors. These are very high thresholds to meet.

Before you sign up to a trust it’s important to seek professional legal and accounting advice to consider whether it’s the right option or whether a contracting out agreement could better serve your needs. Good advice should also include how the trust should be administered in order to avoid potential court action later.

Talk to us

Contact our Litigation & Dispute Resolution Team today to discuss how we can assist you.