A binding financial agreement is one way to manage a property settlement after separation or divorce, and if you are wondering what is a binding financial agreement, it is a written legal agreement that sets out how a couple will divide property, debts, and (in some cases) spousal maintenance if they separate. There are important legal requirements to ensure that the agreement is legally binding. As with many legal arrangements, there are various potential benefits and risks that clients need to understand before entering an agreement.
Key takeaways
What is a binding financial agreement (BFA)?
A BFA allows couples to enter into a legal contract about how to handle marital property after a relationship ends. Both married couples and people in a de facto relationship can form a BFA. It’s the only way to make financial arrangements that are legally enforceable but don’t require the parties to go through the Federal Circuit and Family Court of Australia.
BFAs were included in the Family Law Act 1975 through an amendment in December 2000. In 2009, another amendment permitted de facto couples to enter into financial agreements. This was a particularly crucial step for the rights of same-sex couples.
How does a BFA work?
There’s a straightforward process for creating a BFA. Here’s what’s required, step by step.
Step one: Communicate with your partner
Both parties need to agree to enter the BFA. Any indication of coercion or duress will invalidate the agreement. Make sure that you’re both clear about your expectations. Will you need spousal maintenance? What property division is fair considering your financial future? Have the conversation sooner to reduce the chance of conflicts later on.
Step two: Make a full financial disclosure
Both parties must fully disclose their financial circumstances. An agreement may be set aside if one party is found to have hidden assets. Are you concerned that the other party isn’t being forthcoming about their assets or liabilities? You may wish to approach a forensic accountant to ensure they disclose assets relevant to the agreement.
Step three: Get a lawyer
Each party has to receive independent legal advice to make an enforceable agreement. The advice can’t come from the same lawyer. It’s best to get representation before you start writing out the agreement. You need to use specific wording and include all necessary information. A lawyer will ensure that the agreement meets all legal requirements.
Step four: Draft the BFA
It’s now time to create the written agreement. This is usually handled by one of the lawyers. Here’s some of the major information that should be included:
Both parties should be identified. This means including names, addresses, and other details. This is important because it has to be completely clear who is bound by the agreement.
Include a clause acknowledging that both parties got independent legal advice. The clause should affirm that the party understands how the agreement affects their rights and interests.
Disclose all of the assets and liabilities belonging to each party. This may include:
Bank accounts.
Real estate.
Business interests.
Financial resources such as expected inheritances.
Superannuation interests.
Stock portfolios.
Detail how the asset pool will be divided. Establish who will take possession of which assets and how debts will be handled. Be as detailed as possible to avoid future challenges.
Determine if any financial support will be included. If yes, what will the payments be, and how frequently will they be paid? Outline what events will stop the payments, like remarriage.
Step five: Review the proposed agreement
Once the draft has been completed, both lawyers should review the terms with their client. If there are any concerns, the parties can negotiate adjustments. There may need to be several drafts proposed before a final agreement can be reached.
Step six: Obtain independent legal advice
Each party has to receive independent legal advice about the agreement. The lawyers should ensure that their client understands what their rights and responsibilities will be under the agreement. The client should also be clear about the advantages and disadvantages of the BFA. Once the advice has been given, the parties will get a certificate showing they’ve completed the requirement.
Step seven: Sign and store the agreement
Once everyone’s satisfied, both parties will sign the agreement. Both lawyers should sign the Independent Legal Advice Certificate provided to the parties. Make copies of the agreement for each party to take with them. It’s best to keep the copy in a safe place in case it needs to be revisited.
Step eight: Review the agreement periodically
If you entered the private contract during the relationship, it’s worth reviewing the agreement at regular intervals. An annual review is a good rule of thumb. This is important because circumstances change. If something significant has happened, such as a loss of employment, the BFA may no longer serve a good purpose in its current form.
Key benefits and risks of BFAs
BFAs can be very advantageous or expose someone to great risks, depending on the circumstances. Here are some reasons why you may or may not want to pursue a BFA.
Benefit: Flexibility
A BFA can provide a lot of flexibility, and if you are asking what is a binding financial agreement, it is a written agreement that sets out how property and finances will be divided if you separate. They aren’t subject to the Court’s approval based on its objective process to determine whether a settlement is fair for both parties. As long as the parties get proper legal advice, they may divide their property pool as they see fit. BFAs can also be entered into before, during, or after a relationship.
Benefit: Asset protection
A BFA has clear advantages to an informal agreement. The parties have legal recourse if the agreement is breached. This is crucial to protecting assets. You can save yourself a lot of emotional and financial stress by having that legal protection.
Benefit: Handy for large or complex asset pools
BFAs can be a useful tool for protecting significant assets. They may also provide financial certainty around how complex assets are handled. Some clients have business interests and complex investments. A BFA can allow a party to control exactly how they wish particular interests to be managed.
Risk: Legal costs
BFAs are generally more expensive than consent orders. There can be extensive negotiations that are often priced through an hourly rate. This can be part of the reason why only people with a large asset pool opt for a BFA.
Risk: May be challenged
One of the parties to the agreement may choose to challenge it later on. BFAs can be set aside for a number of reasons, including:
Inadequate disclosure. Disclosure is an essential part of the family law process in financial matters. If one party fails to disclose all assets and liabilities, the agreement may be invalid.
Unconscionable conduct. Both parties have to enter the agreement of their own free will. If there’s any indication that they were forced into it or coerced into agreeing to unfair terms, the court will reject the agreement.
Significant change in circumstances. A financial agreement made during a relationship can’t predict exactly what’s going to happen. Unanticipated changes can occur that mean the agreement no longer reflects the reality of the parties. Changes involving children are a particular reason why the Court may set the BFA aside.
Australian family law is quite strict in its handling of BFAs. The complexities around how agreements need to be drafted lead some law firms to refuse to work on them.
Conclusion
Do you need to make property arrangements but want to avoid court involvement? A BFA could be the answer. If you are asking what is a binding financial agreement, it is a written agreement that can set out property and financial arrangements. There’s a step-by-step process to follow to ensure the agreement is valid and suits your purposes. Before signing anything, understand all the potential risks and benefits.
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