Q.  My wife and I have separated after 14 years of marriage. We have two children aged eight and ten. We agreed that my wife would own the family home which has a small mortgage and I will own our other two properties (our bach and a rental), which have a large mortgage over them. We agreed we would each be responsible for paying the mortgages on our property(s).

A couple of months ago, my wife left her job for no reason and stopped paying the mortgage on the family home. The bank is chasing me for payment, even though I have advised them of the situation. Is there any way around this? The mortgages are still in both our names. Also, we have a family trust which contains these three properties. My wife and I are trustees and the beneficiaries are my wife, myself and our two children. What happens with the trust?

Your mortgage

Unfortunately, since the mortgages are in both of your names and would be considered relationship debts, you are both jointly and severally liable to the bank for the payments. This is regardless of what agreement you and your wife have reached.

That is why you should legally separate all your debts, including your mortgage, when you separate from your partner. This entails breaking your existing shared mortgages and setting up new mortgages in your own names for which you will each have sole responsibility.

Your wife may have difficulty getting a mortgage on the family home if she is not employed. If you both want her to keep the home, you might need to cover the mortgage until she is working again. If you agree that your wife will reimburse you for these payments at some point in the future, then you should document this in a legal agreement.

Bear in mind that when you break your mortgage in the middle of a term, the bank is likely to charge you a break fee. This enables the bank to recuperate the lost income from your agreement. Depending on your current loan balances, the remaining term of your loan and the current mortgage rates, these fees may run into the thousands. Talk to your bank about the break fees and the restructuring of your mortgages.

Whatever you decide to do going forwards, try to cover the outstanding payments as soon as you can. Being in the red will impact negatively on you and your wife for future lending with your bank. If left in arrears for too long, it could impact on your credit rating. Other banks can view your credit rating and be reluctant to give you a mortgage.

Your trust

Family trusts should be addressed when relationship property is settled. You can dissolve a family trust fairly easily and transfer the assets back into your names if permitted by the Trust deed. If only one of you wants to have a family trust at the moment, that person may be able to take over your existing family trust by resettling the trust property into a new trust with new trustees, beneficiaries and assets to reflect your new circumstances.

Your lawyers will advise you on how to approach this. You'll need to consider any tax implications arising from the dissolution of your current trust, and the disposition of trust assets and liabilities.

Having verbal arrangements about your relationship property

Even in an amicable separation, I recommend that couples have a legally binding relationship property agreement. This document details how you will divide your assets and debts and could include, for example, properties, vehicles, shares, loans or credit card debt, bank accounts, artwork, furniture, jewellery and anything else of value to you both. You should change the legal ownership of your assets and debts to reflect your agreement.

The agreement can be prepared yourselves, but for it to be legally binding, you each need to receive independent legal advice and sign the documents witnessed by your respective lawyers. If you need to cover your wife's mortgage payments for a period of time, you could document in your agreement when this amount will be repaid.

Next steps

I'd advise you to meet with your wife as soon as you can to plan how your mortgage payments and expenses will be met over the next few months and to discuss a formal division of your relationship property. Your lawyers will be able to advise you on your family trust.

In my experience, it helps if couples have a clear agreement about relationship property and responsibilities at the outset. This avoids confusion and ongoing discussions about property which can impact negatively on your future relationship. This is particularly important in your situation as you'll be parenting together for a number of years to come.

This article first was first published with the NZ Herald

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