Nowadays in Canada, sadly almost 40% of marriages end in divorce. Although of course there are a number of different reasons for marriages to end in divorce, financial problems are a very common cause for divorce. For this reason, there are naturally many questions from divorcing or separating couples around debt, joint debt, and divorce when a marriage unfortunately comes to an end. In an ideal world, debt issues would be discussed and resolved before a divorce goes ahead, but often the reality is quite different. For instance, does debt get split during divorce? In this article, we explain how debt works during divorce, and how you can protect yourself. Although each situation is very different, here is our advice on the matter.
Does debt get split during divorce?
There are a few variables that determine how debt gets split during divorce. Even if you are not married but have been living together in a common-law relationship for at least two years, debt and property will still likely need to be split. Legally, property is separated into family property and excluded property depending on what was accrued throughout the relationship. In an ideal world during separation or divorce, a couple would be able to divide their debts themselves. If this is not possible, debt resolution and its split may need to be determined by the courts. Ultimately, lenders and creditors do not care how debt is divided. From their perspective, whoever took out the debt is accountable for making the repayments. If they fail to make the repayments, it is their credit report that will face a negative impact. This is regardless of whether or not a spouse contributes to the repayments, and instead whoever’s name is attributed with the debt. In Canada, the courts will usually decide how marital debt is split.
How can you prepare debts during divorce?
There are a few things you can do to allow for debt to be split during divorce or separation. First of all, you need to check the names on any debt accounts. For instance, if you are the primary stakeholder on a credit card and your spouse is also named as a secondary cardholder, you may want to ensure they are removed from the debt. This is so that they cannot add further debt to the account, given that you will be paying the balance. For any joint accounts, you should get in touch with your lender to freeze the account so no more debt can be racked up. In the meantime, you should ensure that at least the minimum payments are made on any debts while you await the courts to decide how the debt should be split. In this scenario, you should speak to a Licensed Insolvency Trustee for advice on how best to handle your debts through separation.
How is secured debt split during divorce?
Secured debts are handled differently to unsecured debts during divorce or separation. Simply put, this is because there are assets in the picture. If your separation or divorce is amicable, you and your spouse may want to consider selling any joint assets like property and vehicles. You can then split the money for the quickest resolution. An alternative solution is one of you buying the other out. If these two pathways are simply not an option, you may want to allow the courts to decide for you. This way, there is a good chance one of you – or both – may be unhappy with the outcome. For any financed or leased vehicles, it is often best to discuss the situation with your lender to determine how best to refinance in either yours or your spouse’s name.
How does the court decide how debt should be split?
The court takes into consideration a number of factors when it comes to determining how to divide debt. Generally speaking, it will split debt equally unless it would be unfair on one spouse to do so. These factors include the following:
- The length of your relationship
- If there are any agreements that were signed and witnessed
- How the debt came about
- If the value of debt is greater than the value of property
- Each spouse’s ability to make repayments on the debt
- If one spouse increased the debt or reduced the value of property following separation or divorce
In order to make a claim to divide debt, you must apply no later than two years after an order for divorce or annulment if you were married. Alternatively, if you were in a common-law relationship, you must apply within two years of the date of separation.
What if your spouse is not paying their share of the debt?
This can be a difficult situation, especially when debt has been split as part of your divorce agreement. Really, the main way to resolve this scenario is to speak to your lawyer. It could be that the case needs to go back to court in order to find a resolution. In order to avoid any further problems, however, you should continue to make the debt payments if you can afford to do so. This is to avoid collection calls or further legal action like a wage garnishment and any negative impact on your credit report. You should also maintain a record of all of the debt payments you make – even if they are not part of your responsibility. This is all until the situation can be resolved properly by the courts as needed.
What if you discover debt that you were unaware of?
You may naturally be alarmed and worried about taking on responsibility for any additional debt you discover from your spouse. Before the divorce goes ahead, both you and your spouse should request your credit reports from TransUnion and Equifax and share with one another. Although in an ideal world transparency about your finances should be a given throughout marriage, this is not always the case and sometimes during divorce, additional debts are discovered. If the debt is in your spouse’s name, they will have to take full accountability for it. If in fact the debt is in your name despite your spouse taking out the debts, you will be accountable for repaying the debt and could face consequences if you do not. Should this happen to you, you should seek advice from a reputable Licensed Insolvency Trustee who can help you to make sense of the debt and how to handle it.
How can you protect yourself from debt during divorce?
Of course, there are many variables that can make each divorce more difficult. This includes things like lack of transparency about debt, or indeed how amicable your relationship is with your spouse. There are, however, some precautions you can take to protect yourself from debt during divorce:
- Remove your spouse from being a secondary cardholder on any credit accounts
- Freeze any joint credit cards so that no additional funds can be used
- Continue to make minimum payments on joint accounts until the court decides how the debt is to be repaid
- Either sell your property and split the funds, or buy your spouse out
- Refinance any vehicles under either yours or your spouse’s name
- Inform your creditors that you and your spouse have separated
- Speak to your bank about any joint accounts you hold with your spouse, and see how you can protect the money
- Ask if you can reduce any overdraft limits, and see if your joint accounts can be changed so that two signatures are required to withdraw funds
- If your spouse is the beneficiary of your investments, RRSPs, insurance, and will, you may want to get this changed
What happens to joint debt if one of you files for bankruptcy?
In Canada, a good proportion of bankruptcies are filed by individuals who have been through a divorce. In most cases, this is because the bills and expenses that were once shared between two people are now down to just one of you following separation or divorce. If there are any joint debts and either you or your spouse files for bankruptcy, the other one of you will have to be accountable for the entire joint debt amount. When this happens, the lender or creditor will then focus on that individual in trying to get their repayments. There are more intricate questions around bankruptcy through divorce, including child support, although a lawyer or Licensed Insolvency Trustee will be best placed to handle and assist with these details.
At Spergel, we understand how stressful and complex going through a divorce can be, without throwing debts into the mix. Our experienced Licensed Insolvency Trustees have been helping Canadians for over thirty years. We are here to help you with important questions like ‘does debt get split during divorce?’, and we will walk you through each step of the journey. Book a free consultation today – you owe it to yourself.