What Happens To Debt In Divorce
Debt by itself can be a scary thing. Coupled with divorce, it can seem insurmountable. As financial issues are a leading contributor to marital breakdown, it can often be difficult to get both parties on the same page when it comes to settling the numerous loans, credit cards and other debts that amassed during the marriage. Further complicating matters, common knowledge is fraught with misinformation about who is liable for repaying the debts and who creditors can target in the event of a default.
Hoping for a fresh start and wanting to better understand who is responsible for what, couples facing a separation frequently visit our offices looking for information. They usually ask a variation of the following two questions:
- Being married, am I now responsible for my partner’s debt?
- What is the best way to settle our accumulated so we aren’t fighting each other for months, or potentially years, after our divorce is finalized?
First and most importantly — no, being married does not necessarily mean you are responsible for your partner’s debts. But it might. To better understand the rules regarding debt in a marriage and the process for resolving it event of a divorce, it is helpful to review the two kinds of debt that will likely exist in the relationship with the rules and consequences of each.
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.
In some cases, separating couples may enter an informal or court mandated agreement to divide the debt equally between both spouses. This may involve requiring the equal payment of a given debt by both parties. It could also mean parceling off responsibility for one joint debt to the first spouse and another joint debt to the second. However, it is important to note only the spouses are bound to the court order or informal agreement. In the eyes of the lender, the debt is still co-owned. Therefore, they are within their rights to pursue the other party if one defaults.
Individual Debt
Individual debts are those in which 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.
In many cases, the balance on the individual debt may have resulted from purchases made by either spouse or may have contributed to the purchase of shared assets such as furniture. However, this has no impact on the ownership of the debt and does not affect who the creditor can pursue for repayment. The rules govern who owns the debt, not necessarily who has used or benefitted from it. Considering this, some couples may also choose to enter separation agreements as above where each spouse agrees to pay a portion of an individual debt or where each individual debt is parceled off to either spouse. As above, even if court mandated, the judgement affects only the couple and the lender would still pursue only the debt owner in the event of a default.
Debt, Divorce and Bankruptcy
The consequences of debt after divorce go beyond deciding who is going to pay for what. The benefits of a dual income and expense sharing that occur in a marriage generally make it easier for both spouses to afford debt payments and other bills. Understandably, those costs are much more difficult for one person to manage on their own. Because of this, it is exceedingly common for one or both spouses to file for bankruptcy or consumer proposal shortly after separating. If only one spouse claims bankruptcy, it leaves the unfortunate burden of any joint debts on the other spouse. At best, this significantly increases 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 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 us for a free confidential consultation and learn whether a Life-Changing Debt Solution might be right for you.
