Marital splits may drive mid-income couples into a financial quagmire.
Marital splits are sad. How often do you hear that a couple has fallen out of love. Disentangling the finances can be difficult.
Most people are aware of the basics of the Property (Relationships) Act, which splits the assets 50/50 as a general rule. There are many more financial consequences.
Suddenly, unless one partner is shacking up with someone else, there are two households to run on the same number of incomes that used to finance the entire family under one roof. What's more, both parties will have become used to a lifestyle that may no longer be sustainable.
Middle-income couples can end up in the financial mire. Sometimes it's a deliberate act by one embittered party. Other times it's the unhappy result of changed circumstances.
A reader, let's call her Simone, emailed me last year with a story that lawyers see all too often. Simone had her head down raising the kids, but was hit by what she calls "friendly fire". "I ended up going down the big snake when my then partner went bankrupt and lost all my savings and any equity I had in our house.
"By the time I had any inkling there was a problem it was too late - he had made some unbelievable financial errors, investments, unpaid tax, borrowed money, etc, and of course I was liable for half. I was amazed at what people assumed I had agreed to in terms of loan arrangements."
Post-split banking can be a real problem. The Banking Ombudsman's files are littered with sad cases. In one case a bank refused to remove Mrs G's name from a joint account after she separated from her husband because the account was in overdraft.
"She was told that, if she closed her individual accounts with the bank, the money would first be applied against the overdraft," the Ombudsman said.
Even when the overdraft was cleared, the bank failed to remove Mrs G's name from the joint account.
"The bank did not respond to Mrs G's letter when she complained that, while she was being told transactions on the account required her former husband's consent, he was allowed to use the account without her consent. Some weeks later, the account was again overdrawn."
In this case the bank was entitled to insist that the overdraft be repaid before removing Mrs G's name. But it should have offered to freeze the joint account at that point, said the Ombudsman, not allow the ex-husband to continue drawing on it.
"This would have protected Mrs G's position and would have ensured that no further withdrawals were made from the account." The bank paid $2000 in compensation.
If joint accounts are not frozen on separation there can be trouble. Mrs E didn't want to rock the boat and decided not to freeze the joint credit card she held with her ex-husband.
Mr E continued to spend and accumulate debt. He was subsequently bankrupted. The liability for the card was joint and several, which enabled the bank to pursue Mrs E for her ex-husband's spending post-separation.
In another case the former husband forged his former wife's signature to get a loan for $130,000 from the couple's bank. She was held 50 per cent liable for the loan by the bank, which claimed her ex-husband had used a power of attorney in her name to get the loan.
Years later she complained to the Ombudsman. It was a complicated case, but the bank eventually reimbursed and compensated the former wife $79,032.60.
In most cases, says barrister Vivienne Crawshaw, both parties act reasonably and sensibly about the financial split and can simply let the bank know what the default limit on the accounts will be.
Crawshaw says the ones you have to watch out for are those where one party is untrustworthy. "He thinks, 'She is never going to get her mitts on my money', and before the other party knows it the asset has been sold and the money has gone west."
Unilateral actions such as selling a joint property or taking all the furniture will usually come out in the wash of a Property (Relationships) Act settlement. If, however, the money has left the country, making that financial adjustment can be almost impossible.
Where there is a potential for that to happen, a former partner could get a bank account freezing order and register a notice of claim on the title of a property, says Crawshaw.
Family businesses really do complicate relationship property claims. Often both partners have signed personal guarantees for the business and are responsible for the debt, as Simone was. This puts their neck on the chopping block.
A surprise some former spouses get is that the family business is sold off for less than its value or driven into the ground and the former partner starts a new business, says Crawshaw. Where this can be proved, there may be recompense available - especially if the former partner has taken the business goodwill with them to the new business. Sorting this out may require forensic accounting advice, says Crawshaw.
Child support payments can be a real shock to some newly separated parents. The Inland Revenue Department says 179,500 New Zealand parents are liable for child support payments and 141,464 of those are in debt, which will result in penalties in most cases.
The forums at Menz.org.nz are full of bitter individuals, an emotion not limited to one gender or the other. It's a common theme on that website to refer to child support as a tax and some parents feel the child support they pay in no way bears any resemblance to the cost of bringing up a child.
Anyone who wants to know what child support would cost in their personal situation will find a calculator at ird.govt.nz/calculators/keyword/childsupport/.
Child support debt doesn't go away simply by ignoring it or skipping the country. The IRD has a reciprocal agreement for collecting child support with the Australian Child Support Program (ACSP). ACSP handles 11,759 cases for New Zealand.
If you no longer work, child support debt will be deducted from Work and Income benefits or from your New Zealand Superannuation when you finally retire. Child support debts don't even go away after bankruptcy.
The Relationship (Property) Act and child support are not the end of the financial story. Spousal maintenance can be granted if it can be proved to the Family Court that one party is unable to meet his or her reasonable needs due to the division of function during the marriage.
The general rule is that spousal maintenance is temporary. "It is a bridge to self-sufficiency," says Crawshaw. Typically spousal maintenance awards last for six months, allowing the parties to adjust their lifestyle to changed conditions.
Where one of the couple has sacrificed his or her career for homemaking and childcare, that partner can also seek a greater share of the couple's property by using section 15 of the Property (Relationships) Act. The act accepts that a simple 50/50 split of assets is not always fair. Where one party can continue earning a good income and building up more assets and the other can't it may be fair to give the latter partner a greater share of the assets.
Crawshaw's final word of advice is there is no need to hurry the process in the first few weeks and months of the split. "In some cases, following a separation the couple agree to sell everything before taking advice. A court may not require that.
"It might say, 'Hold on, you have young children. There is enough property not to immediately sell the home. That can wait for a more financially acceptable time to do so, so that the caregiver of the children has time to sort out their affairs and work towards being financially self-supporting first'."