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Debt and romance can be tricky to balance. Discovering that your future partner is carrying a large amount of debt can be a nerve-wracking moment for anyone, as can sharing with them how much you owe.
How couples manage their money is a deeply personal thing. Many combine their finances to accomplish their financial goals, such as starting a family and buying a home. Others keep their finances partly or entirely separate. No matter how you decide to do it, everyone comes into a relationship with a pre-existing financial situation. If that includes debt, it may seem intimidating.
People often ask our Certified Insolvency Counsellor’s how their spouse’s debt will affect their finances. We’ve tried to answer some of the most frequently asked questions about debt in marriage below.
Even if your credit is not impacted by your spouse’s debt, it’s important to talk about finances openly and regularly. Debt is one of the leading causes of divorce, so it’s important to know what your future partner’s financial situation means to you.
Is My Spouse Responsible for My Credit Card Debt in Canada?
When you’re the partner carrying a large balance on credit cards, it can be difficult to admit it to your partner, but being honest about your finances is an important step in the development of a relationship. Fortunately, spouses are not responsible for their partner’s pre-marital credit card debt in Ontario.
This also applies to debts accrued after you’re married, as long as only one partner takes it out independently, in their own account. How much you want to combine your finances, if at all, is a discussion every couple needs to have. It’s up to you to decide how to manage your debts once you’re married. If you decide to combine your bank accounts, will you also have a joint credit card for shared expenses?
Am I Responsible for My Spouse’s Student Loans or Car Loans?
There are many different ways people bring debt into a relationship. Two of the most common are student loans or car loans, but they can also include mortgages, personal loans, lines of credit, etc. Just like credit card debt, you are not responsible for any debts your partner brings into the relationship unless you decide to formally combine your debts, which you can do through credit consolidation or a line of credit that you jointly sign up for.
There are couples who decide to tackle their combined debt together so that they can build their lives together. Some level of shared financial responsibility may be needed to buy a house or raise a family. Planning family finances may not be fun or easy to do, but it’s important that both partners know and agree to what they’re responsible for and what remains separate.
Can I Be Affected by My Spouse’s Credit Card Debt?
While you cannot be expected to pay for your spouse’s credit card debt, there are circumstances where it could affect you if they stop paying. Creditors can put a lien on your house, even if it is jointly owned. A lien is a claim placed on a property due to unpaid bills, including taxes. When a lien is placed on your home, you’re unable to refinance your mortgage or sell the property.
Am I Responsible for Joint Debt?
Married couples can carry joint debt by signing a legal agreement to share that responsibility. Lenders may ask that both partners in a relationship sign as co-borrowers or that one of you act as borrower while the other co-signs that loan as a guarantor. Whether you’re a co-signer or a guarantor, both of you are responsible for following the terms and making payments. If one of you stops living up to the terms, the other can be held fully and solely responsible.
If your spouse does not keep up with payments on a shared credit card, mortgage, or personal loan, you are responsible for all of it, not half.
Becoming a guarantor on a loan is a major financial responsibility. If someone is applying for a loan or a credit card with poor credit or no credit history, they may ask someone with good credit to act as a guarantor. You should be cautious about becoming a guarantor in any circumstances, even if your spouse is asking you. Treat it like your own debt, because it is. Acting as a guarantor on a card will make your spouse’s credit card debt effectively your own if they don’t keep up with payments.
Can My Credit Score Be Affected by My Spouse’s Debt?
Accounts that your spouse holds independently will not affect your credit score. However, any joint debts that you share will, and as far as the credit bureaus are concerned, there are no mitigating factors just because you’re not the only one who hasn’t paid. Your partner’s credit score will also be negatively affected if neither of you keeps up with payments and the debt goes into collections.
Joint debts or debts on which you are a guarantor can affect your credit score even if you reliably make payments. Even if you are a guarantor, the loan may be counted as part of your credit utilization rate, and it could reduce your personal eligibility for a new loan.
If My Spouse Dies Am I Responsible for Their Debt?
What happens to the debt of a deceased spouse? Sometimes when a loved one passes away, you can be surprised by the outstanding debts they’ve left behind. But are you responsible for them?
In Canada, you cannot inherit debt, and it cannot be transferred to you. You would only become responsible for your spouse’s debt if it were jointly held. Just because you are married does not make you responsible for paying it back unless you shared the account. Credit card companies cannot pursue you for a spouse’s debt if it was individually held.
However, credit card debt after a spouse’s death does become part of the deceased’s estate. Creditors will have a claim on the estate and have a right to be repaid before the funds in the estate are transferred to the beneficiaries of the deceased’s will.
While you won’t be responsible for debt after a spouse’s death, it will be taken out of any inheritances left behind.
What Happens if My Spouse Files for Bankruptcy?
Will you be affected if your spouse files for bankruptcy? One of the most common misconceptions is that your spouse filing for bankruptcy will hurt your credit or make you responsible for those debts. You are protected by bankruptcy laws in Ontario, but there are circumstances under which you will be impacted. It depends on whether or not they are filing bankruptcy on any jointly-held debts and what you own jointly, such as home equity.
Is a spouse responsible for credit card debt after they file for bankruptcy? You do not become responsible for debts that your partner entered into individually. However, you will become 100% responsible for any jointly-held balances that are still outstanding.
If you cannot afford to become responsible for those balances, you should consider jointly filing bankruptcy. You will both have to go through bankruptcy, but one partner will not be left saddled with debts that you jointly borrowed.
The other way your spouse’s debt could affect you is home equity. In Ontario, up to $10,000 in home equity is exempt from bankruptcy proceedings. But if you have equity in excess of $10,000, none is exempt and the debtor will have to pay the full amount into the estate. If they don’t have enough money to do so, they may have to liquidate their home.
If the home is jointly owned, the debtor’s equity is half of the total equity you own as a couple. Together, you would have to own over $20,000 in equity. Should your equity exceed that limit, you have two options to avoid selling your home:
- Your spouse pays their share of the equity to their bankruptcy estate;
- You purchase your spouse’s share of the equity to be paid to the bankruptcy estate.
Another option would be to file a consumer proposal instead of bankruptcy to protect your assets.
Sponsorship and Bankruptcy
There is one more instance where your bankruptcy can affect your spouse (or the other way around): immigrating to the country through sponsorship. Sponsorship is a common way for those who are related to a Canadian citizen or permanent resident to live, work, and study in Canada themselves.
You won’t be able to sponsor your spouse if you are bankrupt, and your application will be rejected. You should wait until you have been discharged from your bankruptcy.