Why a Handshake Deal After Separation Can Cost You More Than Legal Fees
The reason why most people tend to avoid formalizing their separation agreements is to save money and because they want to stay away from more legal battles. This sounds reasonable at first. However, what this overlooks is that by having an informal agreement the legal risk is not eliminated, it is only postponed.
The Finality Problem Nobody Talks About
When a man and a woman shake hands on who takes the house, the savings account, and the car, that deal means exactly zero in the eyes of the law. One of those people can head back to court a decade later and invite the judge to order a different division. If that person’s financial position has changed (they’ve lost their job, for example, or maybe inherited some money) there’s nothing to stop them from seeking that second bite of the cherry and making an application for a fresh property settlement.
Yes, sure, “the lawyers will have a field day” is one of my profession’s favorite sayings. But this isn’t a theoretical risk. By the Australian Institute of Family Studies’ estimation, nearly 20% of separated couples who reach informal agreement later have significant legal disputes or experience financial disadvantage. Do the sums: one in five. And guess what? When a case goes back to court, the costs of a property dispute often outweigh the amount that wasn’t spent on getting the agreement formalized in the first place.
The Tax Cost of Keeping it Casual
One often forgotten practical consideration is that property transfers between ex-spouses can inadvertently incur a large stamp duty bill. A tax bill that most people do not anticipate when simply doing their best to get by.
For instance, without formal Consent Orders in place, stamp duty on a transfer of real estate between former spouses can be hefty. The experienced family law team at Maatouks regularly sees cases where an informal agreement, or even a written agreement that has not been turned into an Order of the Court, means no exemption from stamp duty is available. Tens of thousands of dollars can be the difference here. The cost of finalizing your agreement can seem quite reasonable after this is accounted for.
Superannuation Won’t Move Without Paperwork
Retirement savings are not thought of as a usual asset, however they are one of the biggest assets held by a couple together. Unlike cash and property, you cannot split superannuation based on goodwill.
Most fund trustees will not action a superannuation split unless there is a valid Binding Financial Agreement or Court Order specifically dealing with it. These splits have specific laws and procedures under family law, and fund administrators must comply with it. If a couple walks away from an informal agreement without actually splitting super, then effectively, one party is just leaving money on the table. Money they possibly contributed to directly or indirectly over many years.
Power Imbalances and What Courts Can Actually Do
Not every handshake deal falls over because someone’s out to screw the other person. Some fall over because one person fundamentally didn’t understand the deal they were agreeing to, or because the financial circumstances were based on a dishonest representation in the first place.
The legal requirement for full and frank disclosure is in place for this reason and it happens a lot. If it’s discovered later that one person was hiding significant assets from the other party or covering up the full extent of their liabilities, a court can overturn their informal agreement, and quite possibly reach a less desirable outcome for the party who wasn’t playing with a straight bat.
This is where independent legal advice isn’t something you can negotiate on, it’s frankly a no-brainer. If a Binding Financial Agreement is to be recognized by the court both parties need to have separately obtained their advice from a lawyer. It’s not just a tick-the-box exercise. That’s the step that separates the agreement from an unenforceable agreement in principle.
The Clean Break Affects Your Borrowing Power Too
There is a financial future-proofing angle here that tends to surprise people. When a separation agreement isn’t formalized, you and your ex still exist in the eyes of the law as a financial unit. So, while you may have agreed between yourselves who will pay what, who will keep what and how debts will be divided, legally you are still both responsible for your joint debts.
This can seriously impact your ability to borrow in the future. Let’s say you agree to keep the mortgage on your former marital home until your youngest child finishes college and your ex won’t come after you for a portion of their student fees. If you don’t get that down in writing as a formal agreement, those repayments will almost certainly still impact your ‘debt to income‘ ratio if you ever try to borrow elsewhere. If your ex defaults on the mortgage and you’ve since bought a new place, it’s going to impact you too.
Another point to consider is that most people spend their lives gradually acquiring assets, debts, investments, and savings, and your financial and personal circumstances when you separate from your partner will likely be far removed from what they are before you are old and grey. The guarding of all of the above could be paramount to your financial recovery.
Separation is bad enough without having to stress about whether you’re getting everything you’re entitled to. Think of a formal separation agreement like a guarantee that you’re moving towards your best financial future, and you’re not inadvertently giving an ex anything that should legally stay with you.
