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Too much debt to divorce? Here’s what you need to know

Posted on 3 December 2021

Written by Jeff Adiken

Unfortunately nowadays, a staggering 4 out of 10 marriages end in divorce in Canada. That might not be the most romantic news we want to hear, but it is a sad reality. While there are many reasons for divorces to occur, financial circumstances are an all too common reason. It is little surprise, therefore, that issues and questions around debt and divorce often come about. Although it is often beneficial to resolve debt issues before your divorce, at Spergel we understand this is not always possible. If you are concerned that you and your spouse have too much debt to divorce, we are here to help you resolve and settle issues of debt. So, it is possible to have too much debt to divorce? No – there is always a way to gain debt relief, no matter what your circumstances. In this article, we explain all you need to know about debt and divorce.

Do you take on your spouse’s debt during divorce?

In an ideal world, if you believe you and your spouse have too much debt to divorce, you would arrange how to separate your debts between the two of you before filing for divorce. Often, this is not a reasonable ask depending on the circumstances around your divorce. In this instance, the decision will be made instead by the courts who will decide how the debt is split and repaid. While the courts may decide, creditors do not care about the split of debt brought about by a divorce. As far as they are concerned, whoever took out the loan is responsible for repaying the debt. Ultimately, it is their credit score that will be impacted by the debt too. This means that although the courts may determine that you are responsible for some of the debt, you do not automatically take on the full impact of your spouse’s debt during divorce. Of course, if the debt repayments are made on time and in full following divorce, there will not be an issue. Worrying about taking on your spouse’s debt should not be a factor for holding off on a divorce.

How does debt get split during divorce?

The split is ultimately decided by the courts. Once again, the creditor will only really focus and take collection action against the person who took out the debt if they are missing repayments. There are a couple of actions you can take to avoid further disruption, for example with credit card debt. If, for instance, your spouse is a secondary cardholder on your credit cards, you should have them removed before they can add any more debt as you will be responsible for paying off the balance. Equally, if you have a joint credit card, you should ask your bank or lender to freeze the account. If there is a court case as to who will need to make the repayments on your joint credit card debt, you should continue to make the minimum repayments before a decision is made. If the outcome is unfavourable for you, you should speak to a Licensed Insolvency Trustee who can advise you as to the best pathway to take. You can also learn more as to whether or not your spouse is responsible for your credit card debt.

What if you have made your debt obligations, but your spouse has not?

One of the considerations when it comes to feeling like you have too much debt to divorce is the subsequent action needed. Perhaps the courts decided to split the debt equally between you and your spouse as part of the divorce agreement. Maybe you have fulfilled your debt obligations by making the repayments you were required to, but your spouse simply has not. In this scenario, the situation will need to be escalated to your divorce lawyer. They will help to resolve the issues your spouse is causing you financially. You should, however, continue to make the minimum repayments if you can afford to do so in the meantime. This will prevent the debt from being picked up by a collection agency or causing any damage to your credit score. If you do so, be sure to track any payments that were not your responsibility. If picking up the extra debts is causing you financial difficulty, you should speak to a Licensed Insolvency Trustee as soon as you can. They are best placed to review your situation and advise you on the next steps you should take to avoid debt.

What if you have discovered debts your spouse has that you were never aware of?

This is a major concern when it comes to debt and divorce, and it could even be the reason for wanting a divorce. You will likely be concerned about whether or not you will need to pick up responsibility for this debt you did not know existed. One of the best actions you and your spouse should take before filing divorce is to pull your respective credit reports. You can get these from Canada’s primary credit bureaus, TransUnion and Equifax. Being transparent with your spouse about secret debts and finances is key – it will all come out in the divorce proceedings anyway. If your spouse has debts that you did not know about and they have used the funds, the lender or creditor will come after them, not you. Your spouse will be responsible for making the debt repayments, and it is their credit score that will ultimately be impacted.

What happens to secured debts during divorce?

Secured debts, like mortgages and car loans, operate very differently to unsecured debts. This is because assets are attached to the debt. If your divorce is relatively amicable, the best case scenario is to sell your property or car. The funds can then be split between you both, offering a simple and straightforward solution. An alternative is to buy out your spouse, depending on the circumstances and if this is a feasible option for you. We understand that either scenarios are not always possible. In many cases, the courts will make a decision instead, although there is a possibility that either you or your spouse may be happier with the decision than the other. Where cars are concerned, it may be good to speak directly to the lender or car dealer to see if you can refinance the car under just yours or your spouse’s name.

What happens to joint debt if your ex files for bankruptcy?

A big cause for bankruptcy in Canada is divorce and accruing additional debt. Most often, this is because two households may be trying to live the same lifestyle as they did when two incomes were combined. When divorce comes about, debt may be easy to accumulate while trying to keep up with the additional costs that need to be funded by one income. Another reason for too much debt during divorce is where joint debt exists. Through the divorce, the decision may be made that either you or your spouse decide to file for bankruptcy. This will mean that the spouse who has not filed for bankruptcy will become responsible for the entire joint debt. Creditors or lenders will then likely shift their focus towards that person, perhaps through aggressive methods like collection calls or even wage garnishment. If you are considering bankruptcy, you should speak to Spergel. We have been helping Canadians gain debt relief for over thirty years and we will help you too.

How can you protect yourself from debt during divorce?

Protecting yourself from debt during divorce is a lot more difficult if there is not honesty around finances from both parties. It can be even more difficult if the breakup is not amicable. There are some simple actions you can take to limit any potential financial damage you could face:

  • Remove your spouse as a secondary cardholder on any accounts you share
  • Freeze your joint bank accounts so no further charges can be made
  • Keep up with minimum payments on debts that are due to be addressed by the courts
  • Sell your assets and split the money, or buy out your spouse
  • Refinance any other secured debts in either yours or your spouse’s name 
  • Consult a lawyer to discuss what financial impact you may need to expect from your divorce
  • Book a free consultation with a Licensed Insolvency Trustee to discuss your financial options
  • Partake in credit counselling before your divorce to make sense of your finances and to discuss budgeting through divorce

Having too much debt should not be a reason to stay in an unhappy marriage. There are various ways to combat the financial impact, and at Spergel our Licensed Insolvency Trustees are here to help. We will walk you through all the financial aspects of divorce, including tax implications, joint debts including mortgages, preventing further debts following divorce, and even gaining debt relief if needed. At Spergel, we understand that every divorce and financial circumstance is different, so we will review your individual situation. Remember you do not need to face debt alone during divorce. We understand what a stressful circumstance it is and we are here to help you through it.

Don’t face debt alone – at Spergel, we understand how stressful and emotional going through a divorce can be, let alone the difficulty of handling debt. If you feel you have too much debt to divorce, book a free consultation with us. Our experienced Licensed Insolvency Trustees have helped over 100,000 Canadians gain debt relief in all kinds of situations. We will get you and your finances back on track. Reach out – you owe it to yourself.

Jeff Adiken

Jeff Adiken is a Certified General Accountant and Chartered Insolvency and Restructuring Professional with over 18 years’ experience as an LIT (Licensed Insolvency Trustee). He also manages all of Spergel's personal insolvency offices and is our resident expert on credit card debt and debt-free living. When his 'manager hat' comes off at the end of the day, Jeff is happiest spending quality time with his family at home.

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