Debt and Divorce: What You Need to Know

A young couple getting a divorce and bankruptcy sit back-to-back with their arms crossed.

Table of Contents

Divorce and financial problems are both very stressful situations, and we often see clients dealing with them at the same time. Debt is still one of the leading causes of divorce, and one study showed that couples who fight about money weekly are more likely to separate.

Couples who are in debt and struggling to keep up financially face an uphill battle when they want to file for divorce. The divorce process can be expensive in its own right as you add legal fees to your existing expenses, and each partner faces a higher individual cost of living as they can no longer share expenses.

If there is a large amount of debt involved, the divorce process can be even more complicated. Some couples may consider filing joint bankruptcy or a consumer proposal before separating. However, this comes with significant risks, and it may be better to file individually after their divorce is complete.

When it comes to debt and divorce in Canada, there are no easy answers. The right path forward depends on the particularities of your financial situation, that of your ex-partner, and how much debt you share jointly.

Talking to debt professionals with David Sklar & Associates is the best way forward if you are considering bankruptcy or a consumer proposal before or after a divorce.

What Happens to Debt and Assets in a Divorce?

Before deciding how to proceed with your finances, it helps to understand what happens to debt and assets in a divorce. When you separate, assets and debts are divided either by negotiations between the two of you or as decided by the courts. The goal is to leave both partners on equal footing, and ongoing support payments may be included to that end.

Property acquired during a marriage must be equally split, but the division of assets can be complex, as there are a number of rules and exceptions that can change the outcome. The same applies to debts as well. Jointly-owned debts will be divided in a way the courts deem fair, and individual debts can even be made the responsibility of another partner, but creditors are not necessarily bound by those decisions.

Are You Responsible for Your Spouse’s Debt?

The first question we often get asked is whether or not you are responsible for your spouse’s debt, and the answer should give you some relief. No one is responsible for any debt that is individually taken on by another party. You are not responsible for:

  • Debt that your spouse entered the relationship with, such as student loans;
  • Debt that your spouse took out individually, such as a credit card that is in their name alone.

However, you are responsible for jointly-owned debt, such as a mortgage that you took out together, a shared credit card, or a shared line of credit. There are several ways to deal with a shared mortgage after divorce, and the specifics will likely have to be worked out in your divorce agreement. They typically include selling the home, refinancing the mortgage into one name, or buying out the other spouse’s share of home equity. Mortgages and other types of secured debt cannot be included in a bankruptcy or consumer proposal unless the underlying asset is turned over to the creditor.

What Happens to Co-Signed Debt or Joint Debt?

In some cases, one spouse may co-sign a loan, a credit card, or a lease, such as when one partner has a better credit score than the other. When you co-sign a loan, you become jointly responsible for repayment.

Should you separate, you cannot agree to a contract that gets either party out of co-signed debt without the permission of the creditor. Even if you come to a separate agreement in the divorce process about how to handle joint debt, such as one partner paying exclusively, creditors are not bound by that agreement. The creditor could still pursue either party if the other does not keep up with the payments they agreed to. What happens to co-signers with a bankruptcy is that the creditor will pursue the other signatory for repayment.

What Are Your Options for Dealing with Debt Before or After a Divorce?

Timing your divorce and dealing with financial problems is never easy, and you have a number of options. This section should introduce you to some of the most common insolvency options and how getting a divorce can impact them.

#1 Individual Bankruptcy or Consumer Proposal After Divorce

Filing bankruptcy or a consumer proposal individually after a divorce is often the easiest path to take. Once your divorce is complete, your assets and debt have been divided, and there will be no confusion about how much you own or owe. If you are obligated to pay any support payments such as alimony or child support, this will also be established, and it can help a Licensed Insolvency Trustee determine how much you can afford to pay your creditors and whether or not you qualify for a consumer proposal.

Filing separately also removes uncertainty and dependence on your ex-partner’s participation. When you enter into a joint process, whether it’s a bankruptcy or a consumer proposal, you rely on the participation of both parties. If someone stops cooperating, one party can wind up responsible for the entire debt.

#2 Joint Bankruptcy Before Divorce

The primary advantage of filing together is that it can be more cost-effective than filing separately. Joint bankruptcy will also give you a clearer picture of the debts and assets that must still be divided in the separation agreement.

Urgency is another factor to consider in bankruptcy and divorce that may prompt you to seek debt help before anything else. If creditors are threatening wage garnishment or asset seizure, you want to deal with joint bankruptcy before divorce and as quickly as possible. Divorce can be a lengthy and complicated process. If you’re already failing to keep up with debt payments, creditors may force your hand.

The Disadvantages of Joint Bankruptcy Before Divorce

Joint bankruptcy before a divorce comes with considerable risks. Debt is one of the leading causes of divorce, and bankruptcy can put a strain on any relationship.

One of the disadvantages of joint filing is that both procedures are tied together, and both parties will have to keep up with paperwork and meet their obligations for things to proceed with the other party. Unless both parties are on the same page about filing bankruptcy together, it may not be the best way forward.

If one couple fails to keep up with their obligations, such as payments to creditors in a consumer proposal, the other partner can wind up on the hook for the whole amount. As relationships break down in the lead-up to a divorce, you may not be able to rely on your ex-partner to hold up their end of the agreement.

Couples with a large income disparity may also want to wait until after divorce to deal with their finances. If one partner can expect to make high support payments, they can deduct those payments from their surplus income, reducing the payments that would otherwise have to go to their creditors.

Finally, personal and emotional circumstances may simply take priority over your financial situation. Sometimes it is a matter of personal preference to finish the divorce first and get it over with.

#3 Joint Consumer Proposal Before Divorce

Filing a consumer proposal before a divorce can be very risky. First of all, consumer proposals can last up to five years, depending on how much debt you have to repay. That is a long time to remain financially tied to someone with whom you are separated.

In a joint consumer proposal, creditors are not concerned about which party they collect from or any private agreements about how those payments are split. If one party stops making payments, they can pursue the other party for the entire amount.

If you default on consumer proposal payments, the entire agreement can be dissolved, and you can wind up forced into filing bankruptcy or paying your full debts.

#4 Can Couples File Joint Bankruptcy After a Divorce?

It is not impossible or uncommon to file a joint bankruptcy after your divorce. After a divorce, people often find that they are unable to keep up with debt payments that they managed without issue before their separation. When you can no longer split expenses, your individual cost of living can increase substantially, making it tougher to manage debt payments.

That said, after a divorce, it is usually safer and more reliable to file bankruptcy or a consumer proposal independently.

Bankruptcy and divorce are emotionally taxing and stressful situations to deal with. Talk to a Licensed Insolvency Trustee about the options you have for dealing with bankruptcy and divorce and whether it makes more sense to pursue one before the other.

Photo Credit: gpointstudio via Freepik

Take Your First Step Towards A Debt Free Life

If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

Share This!

I am very pleased with the experience with your company. Great customer service and very professional. They made me feel like dealing with caring and friendly people. Jackie is a sweet lady. All of them very helpful.
Carolina Marroquin
1708815208
I am very excited for the helpful service I receive from David sklar &Associates Inc ! My experience with coronation she is a professional and skill person! We'll done ✔ thank you very much, Gw
garfield wallace
1708730999
Great and friendly staff. They went out of their way to help me with the process. David Sklar and Associates are more then professionals. Christine sylver helped me with every steps, everytime I asked for more help she was always there for me with a smile. Very professional and patient. I want to thank Christine Sylver for everything she did to help me through this process and by giving me a new start.
ray pat
1708550360
I was so nervous to go and then i met trina beautiful compassionate understanding trina how lucky for me what a professional thank you thank you
Penelope Mather
1708303088
It was easy to get everything started and I am happy that I choose you, thank you.
Marina Granado
1707942981
I came in with a lot of anxietyChristine SylverHernee Templonuevogave me the confidence I needed
George Carvalho
1707837852
A great place to find out the best way to remove your debt. I discussed my problem with a with a fantastic lady who's named Grace. This lady showed me a couple of ways to lower my debt and I chose one. Thanks to Grace one day I will be out of debt, but until then my spending without cause has come to an end.To the staff and especially Grace of David Sklar and Associates thank you.Bob Barnesi will be one day out of debt
Robert Barnes
1707781618
A wonderful experience with a very depressing financial situation.Cori is easy to talk to and understand, with what she is describing.
Verble Daniels
1707699079
The staff at David Sklar are absolutely life changing and phenomenal people to work with. They are a well dedicated team whose personal mission is to truly help you turn your life around. Don’t be afraid to call them. Don’t be afraid to be honest to ask for the help you need. Rest assured no matter your debt load they will assist without judgement and deliver with compassion the best way forward to legally seal your debts and give you a real chance again at life. I highly recommend their services. They changed my life. They will gladly help you too. My personal consultant Trina Powell is an incredible, smart, and extremely supportive ally. But know you’re in good hands no matter who they assign to help you. Change your life today and pick up the phone and call them you’ll only be sorry you waited so long.
Kelly Silke
1707344543
This was an is an excellent experience for me because I am now able to retire comfortable in five years an debt free. Life seems to now begin. I should have done this earlier. But I did not have a company to do a consumer proposal with that I trust. Thank you for saving me.
Carilyn HoseinAdams
1707147259
js_loader
DS david skalr icon

Book your free consultation.

Call 1-844-962-9200 or fill out the form below. We’ll do the rest.

Contact Us