The Dangers of Informal Property Settlements

Under the Family Law Act (1975), property settlements can only be formally finalised in two ways: by court orders or by a binding financial agreement. While some parties may choose to divide their assets informally, doing so carries significant legal and financial risks.

Court orders

Property settlements can be formalised through court orders made by a judge or registrar during proceedings. Alternatively, where parties reach agreement, they may apply for Consent Orders without attending court.

An Application for Consent Orders is filed with the Federal Circuit and Family Court of Australia. The Court reviews the proposed orders and supporting material, and if satisfied that the agreement is just and equitable, it will make the orders without requiring a court appearance. If the Court is not satisfied, it may request further information or refuse to make the orders.

Although it is recommended that both parties obtain independent legal advice, this is not a strict requirement for Consent Orders.

Financial agreements

Financial agreements allow parties to finalise property division (and, in some cases, spousal maintenance) without court involvement. Because the Court is not involved, there are strict legal requirements to ensure that neither party is taken advantage of. Relevantly:

• Each party must receive independent legal advice 
• The agreement must comply with a range of formal requirements as set out in the legislation 

If these requirements are not met, the agreement may not be legally binding.

Time limits to commence proceedings

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

Married couples: within 12 months of a divorce taking effect

De facto couples: within 2 years of separation 

However, these limits are not absolute. A party may apply to the Court for permission (leave) to proceed out of time.

The Court may grant leave if hardship would be caused if leave were refused (for property matters), or if the applicant was unable to support themselves without an income-tested pension, allowance or benefit at the time the limitation period expired (regarding spousal maintenance). Accordingly, parties should not assume that the expiry of these time limits prevents future claims.

Risks of Informal Property Settlements

An informal property settlement does not provide legal certainty. Key risks include:

• Lack of enforceability: The agreement is not legally binding or enforceable if one party fails to comply;
• Future claims: Either party may later apply to the Court for a further adjustment, even if your informal property settlement provides them with an adjustment;
• Expanded asset pool: Assets, liabilities, and superannuation acquired after separation may be included in future proceedings;
• Superannuation issues: Super cannot be split without complying with legislative requirements and notifying the fund trustee;
• Loss of financial benefits: Potential stamp duty or taxation concessions may be unavailable, which the parties may receive if they comply with the formal documentation requirements under the Act; 
• Debt exposure: Creditors may pursue either party for jointly held debts, potentially affecting credit history;
• Estate planning consequences: Informal arrangements may create unintended outcomes for beneficiaries; and
• Impact on new relationships: Future partners and jointly acquired assets may become entangled in proceedings.

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.

In most cases, relying on an informal property settlement is not advisable. The legal and financial risks can be significant and long-lasting. Parties should obtain legal advice before entering into any agreement to ensure their interests are properly protected. If you require legal advice or representation in any legal matter, please contact Armstrong Legal.