When you decide to become a couple – there is some truth in the vows “for better or for worse”. You have the opportunity to share in the spoils but you may also inherit debt. You should have the conversation around what’s yours is mine and be honest about what positions your individual finances are in before joining them together.
Dragging the old ball and chain
Knowing where you stand is a good start but you might be wondering whether your partner’s debts are likely to become yours. We’ve all heard the horror stories where someone’s credit card debt meant their partner’s car was sold by the bank, or similar.
So is your partner’s debt now your problem if they default?
Daniella Elchaar, Senior Financial Adviser with BT Advice, says, “you are responsible for your own debts and any debts you jointly hold. Where it gets a bit tricky is that when you have a joint debt or joint asset, there may be situations where the debt your partner holds by themselves could have implications for you”.
For example, say your partner has a car loan and defaults on it, the bank can then turn to your joint assets to reclaim the money your partner owes them. If you can’t afford to pay that debt yourself, you may find some of your assets sold to recoup the debt of your partner.
If you don’t hold joint assets or debt, you might not be legally liable for your partner’s debts if they default but it can still affect your finances. “You want to help your partner because you love them so you might find yourself funding their debt payments. You need to be careful that you can afford to do this and it’s a sensitive situation because some people might resent having to give up hard-earned money to pay for a debt they didn’t hold themselves,” Elchaar says.
The quality of your debt
Just because your partner has a financial debt doesn’t mean you have to run a mile away though. There’s good debt – and bad debt. You might classify something as good debt if it’s likely to benefit you or your partner in the future so effectively, you are likely to be better off having created the debt. An example of this is your university HELP debt because your education is something that is likely to help you in your career. Another example might be a mortgage on an apartment which will benefit you with a living space – or perhaps a rental return – once you have finished paying the mortgage.
On the flip side, bad debt is something that is unlikely to offer you any future value and you are worse off having created the debt. For example, a credit card debt on clothes. Clothes lose their value as you wear them and won’t leave you with any financial gains after you’ve paid off any debt you’ve accrued to buy them. A more serious example of bad debt is that caused by gambling. You’ve effectively lost money with no real long term reward – not even a depreciating asset like a car or clothes. Paying it off is a must but won’t leave you with anything of value to help your future. If you or your partner is a gambler, this can affect more than your finances, it can also affect your mental health. Consider contacting the Gambling Helpline on 1800 858 858 for assistance.
Understanding the quality of your debt and that of your partner’s can help you appreciate whether joining your finances is a positive for you both, or offers serious risks for either of you.
Information current as at 15 August 2017. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it.
Daniella Elchaar is a BT Adviser. BT Advisers are representatives of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714 (Westpac). BT Advice is a Division of Westpac. This publication has been prepared by Westpac. ©BT Financial Group 2017