When love goes bust, what steps do you need to take to protect yourself and ensure your debt is divided fairly?
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If you’re thinking of divorce, you must understand the financial implications of this event. Of course, financial reasons should never be a reason to stay in an unhappy relationship. But I will attempt to give you a clear view of what these consequences will be.
With a divorce, a change in lifestyle will be required. Not only will there now be two households to support, there will be legal fees.
Financial problems and divorce go hand-in-hand. Debt and financial stress are contributing factors to the divorce rate in Canada. So, in many cases, it’s not about agreeing on how the assets will be divided and how much spousal and child support will be paid, it’s about who will be responsible for the debt and how will it be paid now that the household expenses are double.
When looking at assets in a divorce, they’re broken down by marital asset or separate asset and how these can be divided equitably. The same applies to debt.
However, when it comes to the divorce settlement it is usually dealt with as household debt, regardless of whose name the debt is in or who incurred the debt and generally deemed that the debt was incurred as part of maintaining the household.
The debt is generally either secured or unsecured, however consideration should be given to legal fees and the potential of any current and future tax debt.
Secured debt, (most commonly mortgages and car loans), is often the simplest to deal with. If one party is keeping an asset they will usually become responsible for the secured debt associated with the asset.
There will need to be consideration of how the secured debt will be paid and if the party not receiving the asset can be removed from debt. This will require the party receiving the asset to re-qualify for the secured debt in their name only if the debt was previously joint.
In the eyes of the lender, divorce plays no part in who they deem as responsible for the debt . If the spouse is not removed and the debt is not paid the creditors will pursue both parties.
So, who is responsible for the credit cards, lines of credit, and loans from parents?
Generally, this will be looked at as part of the diversion of assets and also who has the ability to pay the debt.
In most cases any divorce or separation agreement will have a clause giving the non-paying spouse the right to collect all missed payments.
This is all well and good, but if the paying spouse can’t make the debt payments, it is unlikely they will be able to pay the spouse. So it’s important to fully understand whose name the debt is in and who is responsible for the debt in the eyes of the creditors.
If the debt is only in the name of the paying spouse, then the non-paying spouse has no concern that the bank will pursue them for the debt.
However, if it is joint or co-signed then they can be pursued regardless of what the divorce agreement states. It is advisable to also consider the available credit on the credit facilities (credit cards, lines of credit, etc.) and closing any joint or co-signed accounts so the debt does not increase and everyone fully understands their potential liabilities.
As mentioned, if the agreement is reached that one spouse will be responsible for the debt and the other is not, where possible the non-paying spouse should be removed from those credit facilities to eliminate uncertainty of what happens if the debt isn’t paid.
However, the creditor will usually require a new application be completed and the paying spouse will need to qualify for the credit on their own merit based on a number of factors including income, assets and credit score.
Credit cards may be set up with a spouse as a supplementary card holder only, which may or may not carry liability for anyone other than the primary card holder.
In this instance, reviewing the card agreement and the liabilities of the supplementary card holder is important. It may be as simple as the primary card holder cancelling the supplementary card if they are going to be responsible for the debt going forward.
Remember, creditors do not care what a separation agreement or divorce agreement says, they only care who signed the agreements to repay the debt. On joint debt, each person is liable for the full amount of the debt, not just 50%, if the accounts aren’t paid.
For a person that cannot pay off their debts, they can consider filing a consumer proposal or for bankruptcy under The Bankruptcy and Insolvency Act (BIA).
The BIA lays out the rules for bankruptcy and consumer proposals and provides legal protection and a solution for a person who cannot pay off his or her debts.
In most situations, when someone files under the bankruptcy act, the biggest impact is on the creditors, however in a divorce situation the impact can be on the spouse also.
Spousal and child support are non-dischargeable debts so these cannot be impacted. In some situations a bankruptcy can make it easier to make these payments by eliminating other dischargeable debts.
The biggest impacts are as follows:
In summary, when you are dealing with debt as part of a divorce you need to think beyond what the divorce agreement states and take additional measures to protect yourself.
Where possible, try to ensure that actual separation is created on all debts and assets and that you don’t rely solely on the agreement to protect you. If you are keeping an asset, have the your ex-spouse removed; if your ex is paying a debt, have yourself removed.
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