Managing debt through divorce: What to consider

For many couples, separation doesn’t just mean the end of a relationship. It also means a complete restructuring of their financial lives. Debt can add another layer of complexity to the process. While every situation is unique, the pandemic served as a reminder of how financial stress can deepen relationship challenges and accelerate major life changes, including divorce. According to Canadian law firms, divorce filings rose by as much as 20 percent by the beginning of 2021.

It's no secret that money and debt are familiar sources of tension in relationships. Financial strain, whether from job loss, unexpected expenses, or increasing debt, can intensify existing challenges and influence life-changing decisions.

But when debt is involved, separation isn’t always straightforward. Divorce often raises difficult questions about who is responsible for repaying what. What happens if one person can’t keep up with payments? Can creditors pursue a former spouse? And what if one partner files for bankruptcy or a consumer proposal?

Understand your shared debt obligations

Most couples carry at least one form of joint debt, such as a mortgage, credit card, loan, or line of credit. When both names are on the account, each person is equally and legally responsible for the full amount. That means if payments stop, creditors or collection agencies can pursue either spouse, regardless of what your divorce or separation agreement says.

It’s also important to understand the difference between a joint debt and being an authorized user. Some financial institutions allow account holders to add a spouse, friend, or family member to a credit card, often issuing a card with that person’s name. However, if the second person didn’t co-sign for the account, they’re not legally responsible, even if they made purchases.

With true joint debt, both parties will have applied and signed for the account. The lending agreement will state that both are fully liable for the entire balance, not just a share of it.

During separation or divorce, some couples agree to divide joint debts between them. They may either take on different debts or each commit to a portion of the payments. But it’s important to remember that creditors are not bound by these arrangements. If one person falls behind or stops paying, the other may still be held responsible for the full amount.

If you’re navigating joint debt during divorce, consider these options:

1. Contact creditors to remove one name from the account: If the balance is manageable and both spouses have strong credit, you may be able to remove one person’s name from a joint debt legally. This can help create a clean financial break and reduce the risk of future issues.
2. Sell assets to pay down joint debt: If splitting the accounts isn’t feasible, consider including a clause in your separation agreement to sell shared assets and use the proceeds to repay as much joint debt as possible. This approach reduces ongoing obligations for both parties.

Divorce can make debt more complicated to manage

Separation is often seen as a fresh start. But for many, the shift from two incomes to one can make it harder to keep up with everyday expenses, let alone debt payments. What begins as a new chapter can quickly bring new financial challenges.

In most cases, when one partner stops making payments on joint debt, it isn’t out of carelessness or bad intent. It’s because they simply can’t keep up. If one spouse files a consumer proposal or declares bankruptcy, the financial burden often shifts to the other. Since separation agreements don’t bind creditors, they may contact the remaining account holder for full repayment, adding even more pressure to an already difficult situation.

Licensed Insolvency Trustees can help

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

Whether you’re breaking up on good terms or bad, there are several options to resolve financial problems. If you’re in financial difficulty, it’s essential to speak with a professional who understands your situation and can provide tailored options for your unique circumstances.