Debt Relief Experts
Dealing with debt during divorce is often more complex than dividing assets. While you may agree on who will pay what debts in your divorce agreement, your creditors may have different ideas. Understanding how debt affects your divorce, and vice versa is crucial for protecting your financial future.
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Are You Responsible For Your Spouse’s Debt in Divorce?
You are not legally responsible for your spouse’s debts unless you have taken them on jointly as a co-borrower or co-signer on the account. This applies whether you are legally married or in a common-law relationship.
For any joint debts where both spouses’ names appear on the account, you are “jointly and severally liable.” This means each spouse is 100% responsible for the total amount, regardless of who made the purchases or why. Creditors can pursue either spouse for the entire balance, even if your divorce agreement assigns the debt repayment to your ex-spouse.
Individual debts remain separate by law. Debts in your partner’s name remain their responsibility. Common examples include student loans, bank loans, and credit cards, which are in their name only.
Can a Divorce Agreement Divide Debts?
The concept of marital or family debt can complicate matters during divorce proceedings.
Debts incurred during your marriage might be considered marital debt, even if they’re only in one partner’s name. This could include various types of debt like credit cards used for household expenses, lines of credit for home renovations, or car loans for a family vehicle. Your divorce agreement might divide family debt between you, but this doesn’t change creditors’ rights to collect. This is because, legally, debts are either joint or individual.
The obligation to repay debt cannot be legally transferred through a divorce or separation agreement without the consent of your creditors.
If your ex-spouse fails to pay joint debts assigned to them in the divorce agreement:
- Creditors can still pursue either spouse for joint debts
- You may need to pay the debt and then seek reimbursement through family court
- Your credit rating can be affected even if the agreement says your ex is responsible
Your divorce agreement might divide debt repayment responsibilities between you, but this doesn’t change creditors’ rights to collect. You are getting divorced from your spouse but not your bank. They are not a party to the divorce, so just because your separation agreement says that your ex-spouse is assuming the joint debt unless the lender agrees to it, it’s not legally binding.
Who is Responsible for Credit Card Debt in a Divorce?
In a divorce, the obligation to repay credit card debts and lines of credit you owe cannot be legally assigned by a divorce agreement like assets. Who is responsible to pay credit card debt after a divorce depends on the type of card:
Supplementary Cards: These are cards where one spouse is the primary cardholder, and the other is an authorized user. Generally, only the primary cardholder is legally responsible for the debt. Responsibility for payment cannot be transferred in a divorce decree. It is better to remove secondary cardholders from your accounts during separation.
Joint Credit Cards: If both names appear on the statement or you were co-applicants, both spouses are fully responsible for the entire balance. This includes charges made by either spouse. Cancelling the card doesn’t eliminate responsibility for existing debt. Even if your divorce agreement assigns the debt to your ex-spouse, the credit card company can still pursue you for payment. It is wise to cancel joint credit cards as soon as you separate and get new cards in your individual name.
Remember: Credit card companies aren’t bound by your divorce agreement. If you have a joint credit card and your ex-spouse fails to make debt payments as agreed in your divorce, the credit card company can still demand payment from you if you are the primary cardholder or if it is a joint card.
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What Happens to Secured Debts in a Divorce?
Secured debts like mortgages and car loans present unique challenges during divorce because they’re tied to specific assets. Both the debt and the asset must be dealt with together. Even if one spouse keeps the asset, both remain responsible for the loan until it’s refinanced. The lender can seize the asset if mortgage or loan payments aren’t made, regardless of who’s living there.
If you transfer secured assets in a divorce, try to remove your name from any secured loans for assets your ex-spouse is keeping. Get the asset refinanced in one name only if possible. If you can’t refinance, consider selling the asset and splitting the proceeds.
Remember: Until a secured loan is refinanced or paid off, both spouses remain legally responsible for the debt – even if your divorce agreement says otherwise. Missing payments could result in asset seizure.
What Happens to Tax Debt in a Divorce?
Tax debt in divorce can be complicated when more than simple employment income is involved. Generally, you’re not responsible for your spouse’s personal tax debt to the Canada Revenue Agency (CRA), even during marriage or divorce. However, there are important exceptions you need to understand.
- Be cautious when transferring assets during separation. Under Section 160 of Canada’s Income Tax Act, if your spouse transfers property to you at less than fair market value to avoid paying taxes, the CRA can hold you responsible for their tax debt.
- If you own property jointly with a spouse who has tax debt, the CRA may place a lien on the property. However, this lien only affects your spouse’s share of the equity – your portion remains protected.
- Finally, while the CRA considers tax debt to be individual, family law may view it differently. If tax debt arose during your marriage from income or decisions that benefited your family – like tax deductions that reduced family tax payments or business income that supported household expenses – your divorce court might consider this a family debt to be divided between spouses. This doesn’t change your relationship with the CRA, but it could affect how the value of assets and debts are divided in your divorce settlement.
How Are Business Debts Handled?
Business debts affect divorce differently depending on how the business is structured. For sole proprietorships, business debts are considered personal debts. Corporate debts generally remain with the corporation unless you personally guarantee the loans. While you may not be liable, these debts will affect the value of the business.
Be particularly careful with personal guarantees on business loans. If you signed as a guarantor on your spouse’s business debt, you remain responsible for this debt even after divorce unless the lender agrees to remove your guarantee. This obligation continues even if you have no ownership interest in the business after divorce.
Managing Bank Accounts During Divorce
Joint bank accounts require special attention during a divorce. Even after separation, both parties have full access to joint accounts until they are closed. You’re both responsible for overdraft repayment, regardless of who spent the money.
It may be a good idea to freeze shared bank accounts to prevent unauthorized withdrawals and open new individual accounts at a different bank.
What About Debts Acquired During Separation?
Any new credit cards, loans, or lines of credit opened after separation typically remain the responsibility of the borrowing spouse.
If one spouse continues to use joint debt credit accounts after separation, you will still be responsible for any new balances. That is why all joint debts should be cancelled upon separation to ensure one spouse does not rack up balances without the other’s consent or knowledge.
Can You Remove Your Name From Debt Accounts?
If you are getting divorced with debt, you can talk to your bank before you sign the separation agreement about getting two separate loans in each of your names to pay off the old joint debt. Your bank probably won’t remove your name from the account if there is an existing balance. They will want to be sure they can collect despite your divorce. If you have good credit, you can each borrow your share to pay off the full balance. Once the old accounts have been paid off and balances transferred, close the pre-divorce credit accounts.
Managing Joint Accounts During Divorce
Good debt management practices are important before, during and after divorce. Take these steps to protect your personal finances during divorce:
- Make a list of every joint account, credit card, and loan
- Consider freezing or closing joint credit cards
- Consider refinancing secured loans if the assets are transferred to one spouse
- Set up bank accounts and apply for new credit in your name only
- Monitor your credit report regularly
- Keep detailed records of all account activity
- Notify creditors of your separation in writing, change your address
- Ask about options to remove your name from joint accounts
Remember: Your credit score doesn’t care about your divorce agreement. Late payments or defaults will affect both parties on joint accounts. If your ex-spouse stops paying debts they agreed to pay, you may need to make the payments yourself to protect your credit rating and seek reimbursement through family court.
Bankruptcy and Divorce
Bankruptcy and divorce add another layer of complexity to an already challenging financial situation. If your ex-spouse files for bankruptcy, any joint debts you share become your full responsibility.
The timing of bankruptcy versus divorce matters significantly. Filing for bankruptcy before finalizing your divorce can impact how assets are divided and which debts remain. Conversely, if your divorce agreement is already in place when your ex-spouse files for bankruptcy, you might find yourself responsible for joint debts that were originally assigned to them.
It is also important to know that support payments, including child support and alimony, cannot be discharged by a bankruptcy or consumer proposal.
What To Do When Divorce Causes Debt Problems
If your financial situation makes debt repayment difficult, you may need to explore debt relief options like consolidation, a consumer proposal or bankruptcy. Given these complexities, it’s crucial to speak with a Licensed Insolvency Trustee before finalizing your divorce.
Debt problems during divorce can feel overwhelming, but you don’t have to face them alone. At Hoyes Michalos, our Licensed Insolvency Trustees can help you understand your options and make informed decisions about your financial future. Contact us today for a free consultation to discuss your situation and learn about solutions that could work for you.
