The Dangers of Informal Property Settlements

Under the Family Law Act (1975), there are two ways of formally documenting a property settlement. These are by orders of a court or by financial agreements. While many parties may be tempted to bypass these formalities and opt for an informal property settlement, there are significant dangers involved in doing this. This article outlines the process of obtaining court orders and financial agreements and some of the dangers of informal property settlements.

Court orders

Court orders can either be made by a judge or registrar in court proceedings or if an agreement is reached without the need for court intervention, with an Application for Consent Orders. An Application for Consent Orders can be made to the Family Courts, and once filed, the proposed orders and supporting application are reviewed by the court (without the need for a court appearance) and if approved, orders will be made.

If the court is not satisfied that the proposed orders are just and equitable, it may request further information or refuse to make the orders at all.  Although it is recommended that both parties seek legal advice, this is not required.

Financial agreements

Financial Agreements can finalise property settlements (and in some circumstances, spouse maintenance) without the need for an application to be made to the court. There are strict procedural requirements on how these agreements must be entered into, including a requirement that both parties receive independent legal advice prior to entering into the agreement.

While parties could simply divide up their assets and liabilities amongst themselves by agreement, as an informal property settlement, this is highly unlikely to be in their best interests. While this may be attractive to some people as lawyers are not necessarily required, there are significant risks involved in doing so.

Time limits to commence proceedings

There are time limits to commence property settlement or spouse maintenance proceedings set out in the Act. These are as follows.

1. One year from the date a divorce takes effect for married couples; and
2. Two years from the date of separation for de facto couples.

These time limits might offer some limited protection, but it’s important to be aware that even after the expiry of those time limits, a party can still apply to the court for leave (ie. permission) to proceed out of time. When deciding whether to grant leave, the court must be satisfied that:

1. In the case of a property settlement application, that hardship would be caused to the party applying for leave (or a child born of your relationship) if leave were not granted; or
2. In the case of an application for an order for maintenance, that at the time the limitation date expired, you were unable to support yourself without an income-tested pension, allowance or benefit.

Therefore, parties cannot rely solely on the expiry of the time limit set out above.

What risks do you face if you opt for an informal property settlement?

If you do not document your property settlement agreement formally, either with orders or with a Financial Agreement, you run a number of risks. These are outlined below.

1. The other party will not follow through with the agreement, and any agreement that has not been documented in accordance with the requirements of the Act is neither binding nor enforceable if that agreement breaks down;
2. Super cannot be split without complying with the requirements of the Act, including providing procedural fairness to the trustee of the fund as required;
3. Even after parties separate their finances and assume that the matter is resolved, either party could apply to the court later for a further adjustment, notwithstanding what they have already received;
4. Any additional assets, liabilities or superannuation that either party builds up after an informal settlement will be included in the asset pool if proceedings are commenced in the future;
5. Parties will not have any of the duty or taxation benefits that they might otherwise have been entitled to if their agreement is not documented formally in accordance with the requirements of the Act. While you should also speak to your accountant as well as your lawyer about this, the costs of not documenting an agreement formally may be higher than any legal fees that may have been incurred in doing so may have been;
6. If parties had a liability in joint names and one party does not maintain their obligations, there is nothing to stop the creditor from chasing the other party to meet the outstanding obligations. The first party’s default may negatively affect the second party’s credit history;
7. A failure to document an agreement formally may have unintended consequences for a party’s estate, negatively affecting their beneficiaries.
8. If a partner has moved on in a new relationship, and the couple has combined resources to purchase new assets, the relationship could be put under strain if they then find themself a party to proceedings seeking a further adjustment.
9. Litigation is always uncertain. While there is no guarantee that any future proceedings for a further adjustment would be successful, the legal costs of either pursuing or defending such an application can quickly add up and the proceedings can be lengthy and stressful. There is a general rule that each party to family law proceedings pays their own costs, and the court deviates from this in very limited circumstances. Even if you are successful, the costs of proceedings are likely to exceed the costs of documenting the agreement formally in the first place.

Having regard to the above, it is very rarely advisable to rely on an informal property settlement.  The risks you may face in doing so should be discussed with your lawyer prior to making any decisions.

If you require legal advice or representation in any legal matter, please contact Armstrong Legal.