When separating or divorcing, one of the primary concerns for many individuals is the division of property and assets. While some parties may try to bypass legal procedures and come to an informal agreement regarding the division of their property, this approach can carry significant risks. It’s essential to understand why informal property settlements can lead to complications and how formalising the settlement can provide greater security.
What is an Informal Property Settlement?
An informal property settlement occurs when two parties agree on how to divide their property, assets, and liabilities, without formalising the agreement through legal channels such as a Court Order or a Binding Financial Agreement (“BFA”). This can happen when both parties come to a mutual understanding and decide to avoid the often-lengthy process of formal negotiations or Court hearings.
While an informal settlement might seem like a quicker and easier solution, it can create numerous potential issues down the line, particularly if one party later changes their mind or disputes the arrangement.
Risks of Informal Settlements
- Lack of Legal Protection
One of the primary risks associated with informal property settlements is that they are not legally binding. Unlike formal agreements, an informal settlement doesn’t provide the parties with the same level of legal protection. If one party wishes to contest the division, there may be no legal recourse to enforce the informal agreement. Without a Court Order or BFA, there is no official record of the arrangement, and a party may change their mind or refuse to comply with the terms. - Unforeseen Financial Discrepancies
When parties attempt to informally settle their property matters, there is a risk of overlooking important financial aspects. This can include failing to properly value assets, overlooking certain liabilities, or not taking into account long-term financial implications such as superannuation or tax liabilities. In some cases, one party may not fully disclose all assets or debts, leading to an unfair division. Without a formal Order in place, there is also a risk that one party might not fully understand the financial implications of the settlement. For example, there could be hidden assets or income streams that are not properly disclosed or assessed, leading to an inequitable distribution. - Failure to Address Future Needs
Informal settlement often fail to consider the future needs of each party, such as ongoing financial support, spousal maintenance, or the care of the children. A formal property settlement, particularly if approved by a Court, will ensure that future needs are taken into account, including considerations like the ability to maintain a high standard of living, housing needs, or the long-term impact of the division of assets. - Difficulty Enforcing the Agreement
Even if both parties agree to an informal settlement, enforcing it can be challenging if one party later refuses to comply. Without the backing of a Court Order or a legally binding agreement, the enforcement of an informal agreement may require additional legal action, which can be costly and time-consuming. This can create a situation where one party feels they were unfairly treated or cannot hold the other party accountable for their share of the settlement. - Potential for Future Legal Disputes
Over time, circumstances may change. One party may experience a change in their financial situation, health, or other factors that could make the original informal settlement unfair or impractical. In these cases, the settlement may need to be revisited or modified. However, without a formal agreement in place, it can be difficult to revisit the terms of the arrangement or challenge the original agreement in Court. If a dispute arises years down the line, especially regarding the division of property or the terms of support, the absence of a legally binding agreement can result in costly and prolonged litigation.
How to Protect Yourself with a Formal Property Settlement
To avoid the risks of informal property settlements, it is advisable to take steps to formalise the arrangement legally. This can be done through the following:
- Apply to the Court for Consent Orders. A Consent Order is a legally binding Court Order that approves the terms of the settlement. It provides legal protection, making it enforceable if one party doesn’t comply with the agreed terms;
- Engage a lawyer to prepare a BFA for the parties to sign. A BFA is a contract that outlines how property and assets will be divided in the event of a separation. It can be entered into either before, during, or after the relationship and offers a high level of legal certainty. Once signed, a BFA is legally binding and enforceable, giving both parties peace of mind; or
- Engaging a family law is a crucial step in ensuring that any property settlement is fair, comprehensive, and legally sound. A family lawyer can help both parties understand their rights, assist in negotiating the settlement, and ensure that all aspects of the agreement are properly documented and formalised. They can also help identify any potential issues or hidden assets, ensuring a more equitable division of property.
Need Legal Advice?
While informal property settlement may seem appealing due to their simplicity and speed, they carry significant risks that can cause long-term complications for both parties. Without formalising the agreement through a Court Order or BFA, there is little legal protection, and disputes may arise in the future.
To ensure that a property settlement is fair, enforceable, and legally binding, it is always recommended to seek professional advice and formalise the agreement through legal channels. By taking the time to property address property division through legal means, you can avoid the pitfalls of information settlements and secure a fair outcome that protects both your financial future and your peace of mind.
To speak with one of our family law experts, please contact our office on +61 3 9101 8532.