Debt by itself can be a scary thing. Coupled with divorce, it can seem over whelming. Financial issues are a leading contributor to marital breakdown, and it can often be difficult to be on the same page when it comes to settling loans, credit cards and other debts that have accumulated during the marriage. Making matters worse, there are many misconceptions about who is liable for repaying the debts and who creditors can target in the event of a default.
Most importantly — no, being married does not necessarily mean you are responsible for your partner’s debts. It depends on who signed what. To better understand the rules regarding debt in a marriage and the process for resolving it in the event of a divorce, it is helpful to review the two kinds of debt that will likely exist in the relationship.
First is joint debt. A joint debt is one in which more than one party has co-signed for the debt — be it a loan, line of credit, credit card or mortgage. It could also be a debt another individual has guaranteed if one party’s credit was sufficiently poor to acquire it on their own. Each person whose signature is on the debt contract shares equal liability for the debt — in this case, both spouses. In the event of a default situation, the lender can take measures, ranging from collections to potential lawsuits, against any or all parties to recover the money owed.
Then… there is individual debt. This debt is where only one person has applied and signed for the debt. The agreement is between a single individual and the lender. This may be a debt acquired before or after entering the marriage and can include credit cards, income tax debt, vehicle loans or financing, personal loans, overdraft, lines of credit and more. As only one spouse signed for the debt, only that individual is legally responsible for paying it back. If they default, the lender cannot go after the other spouse for payment.
The consequences of debt after divorce go beyond deciding who is going to pay for what. If only one spouse claims bankruptcy, it leaves the unfortunate burden of any joint debts on the other spouse. At best, this significantly increases the size of the other spouse’s debt and delays them from becoming debt free. At worst, it may drive the second spouse to also file for bankruptcy or a consumer proposal.
Getting a divorce is often about making a fresh start, emotionally and financially. If you have debt in your relationship and are considering filing for divorce — or if you are experiencing a financial crisis because of a separation — meeting with a Licensed Insolvency Trustee can provide you with options. Call MNP for a free confidential consultation and learn whether a Life-Changing Debt Solution might be right for you.
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