What you need to know about divorce and debt

The pandemic, childcare challenges, and the difficulties of spending much more time together during lockdowns made 2020 a difficult year for many couples. According to Canadian law firms, divorce filings rose by as much as 20 percent by the beginning of 2021.

This shouldn’t come as a surprise. Money and debt are points of contention in many marriages. Add the stress and uncertainty to the equation, and it’s easy to see how this can push many already tenuous romantic situations beyond the breaking point.

But when there’s debt involved, divorce isn’t quite as simple as a couple splitting the assets and going their separate ways. There are important — and often contentious — questions around who’s responsible repaying debt. What if one person can’t make their debt payments after the divorce? Can creditors automatically go after a spouse if the other files a bankruptcy or a proposal?

Be clear on joint debts

Many couples have some type of joint debt, meaning each person has equal legal liability. This is usually a loan or line of credit from a financial institution, credit card, or mortgage. In these cases, creditors and collection companies can pursue both spouses if the debt isn’t repaid — even if there is a formal agreement in the divorce for one partner to take responsibility for it (more on that below). 

It’s important to note the difference between a joint debt and an authorized account user. Many financial institutions allow a credit account owner to obtain a second card or provide online access for a spouse, friend, or family member. In the case of a card, this may even have the other person’s name on it. This, however, is not a joint debt. The original account owner retains full legal responsibility for the debt, including for charges the other person incurred.

In a joint debt, both partners will have co-applied and co-signed for the debt. Both their names and signatures must be on the contract, where it will stipulate each person shares liability for 100 percent of the debt.

During a divorce, many couples agree to divide joint debt equally. For example, each spouse may agree to make equal payments on a particular debt, or they may agree to assign one joint debt to one partner and another to the second person.

Creditors do not care what is written into a separation agreement, nor are they bound by those terms. If one person stops paying on a joint debt, the creditors will pursue both account owners for the amount owing.

Two options couples may want to consider are:

1. Reach out to creditors to sever the joint agreement: If the balance is low enough and both spouses have good credit, it may be possible to legally remove one person’s name from a joint debt. This can help couples make a clean break and protects each from the other’s potential future hardships.
2. Sell assets and pay off joint debt: If it’s not feasible to sever a joint debt, include a clause in the separation agreement to sell shared assets and repay as much joint debt as possible. This will reduce the amount of joint debt either individual is responsible for.

Divorce can make debt unmanageable

A divorce, breakup, or separation is supposed to provide both spouses with the chance to start fresh. Unfortunately, many find it difficult to manage the cost of living and debt payments after going from two incomes to one. This new beginning therefore often comes with new financial difficulties.

The reason one partner usually stops paying against joint debts isn’t because they’re negligent or malicious, it’s because they can’t manage their new financial reality. Often when one spouse files a Consumer Proposal or a Bankruptcy, it may lead to the other spouse needing to review their financial options as the creditors will start calling looking for full payment of any joint debts.

Licensed Insolvency Trustees can help

A no-obligation Free Confidential Consultation with a Licensed Insolvency Trustee prior to a separation can be of significant help. The Trustee will review your financial situation and goals and recommend options to deal with your outstanding debt.

Whether you’re breaking up on good terms or bad, there are a number of options to resolve financial problems. If you’re in financial difficulty, it’s important to speak with a professional who understands where you are coming from, and who can provide options on your unique situation.