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Am I Responsible for My Spouse’s Debt After Divorce?
What happens to debt in divorce is an important question when your relationship comes to an end. The financial fallout can be a surprise and a challenge. Upon discovering the true cost of divorce, many wonder how they will be able to pay for it all.
In any marriage, debt can be a significant part of the life you build together. People take out mortgages, lines of credit, car loans, and may still be dealing with student loans when they start their lives together. It’s normal, but too much debt and incompatible financial habits can be difficult to navigate. Combined with opposing attitudes toward money and financial priorities, debt can place considerable strain on a relationship.
Here, we’ll look at how debt is divided in a divorce, who is responsible for paying what, and what happens when you can’t afford to pay it all.
The licensed insolvency trustees at David Sklar & Associates are here to help you answer all of your questions. If you’ve already gone through a divorce and you’ve realized the debt implications are too much to handle on your own, book an appointment with a Licensed Insolvency Trustee to discuss your options.Let’s Talk
Who Is Responsible for Debt after a Divorce and how will the Debt be divided?
In the eyes of a creditor, legal responsibility for the debt always belongs to the person who applied for the credit and signed the agreement. In the case of the Canada Revenue Agency (“CRA”), tax debt is traced to a particular taxpayer. A relationship through marriage does not make a person responsible for the partner’s debts. Upon separation or divorce, legal responsibilities for the debts do not change.
If two or more people applied and signed up for the credit, the creditor will hold all of them responsible for the repayment until the creditor is paid in full. This is true for any type of conventional credit: mortgage, line of credit, credit card, car loan, car lease, etc. If the debt is shared between two or more people, the debt is referred to as joint debt.
A co-responsibility for the debt might also arise in cases when a person co-signed a loan agreement or personally guaranteed it.
Do not believe in a myth that two people are responsible for the joint debt on a 50/50 basis. If one borrower does not pay their share, the other is still responsible for 100% of the amount owing to the creditor.
Upon separation or divorce, the parties may privately (between the two of them) agree on how they want to manage the payments on their debts. For example, they might decide that on a joint debt, each will contribute a 50% payment. The couple may also decide that one person will take 100% responsibility for the repayment of the other person’s individual debt. It is important to understand that because this is a private agreement between the two former partners, it does not change anything for the creditors. The creditor will accept the payments from anybody but if a payment is missed, the creditor will pursue the original borrower(s) under the credit agreement.
Accordingly, even if there is a divorce order, it is highly unlikely that the creditor will agree to remove a name from a joint credit facility while there is still an outstanding balance. A divorce order is not binding on the third parties since they never agreed to those terms.
Each party would have to exercise good faith and not borrow further money from the joint credit facility. Once the balance is paid off, you should remove your name from the joint debt or, ideally, close the account.
If there are joint debts and your former partner files bankruptcy or makes a consumer proposal, you will wind up being entirely responsible for the unpaid balance of the joint debts.
To help you to identify joint debt, you may pull a copy of your credit bureau report.
Debt and Common Law Relationships
Common-law relationships are increasingly frequent, but when they come to an end, the same rules apply to debts as when a marriage ends. Only joint and co-signed debts are shared. Your debts remain your legal responsibility, and your partner’s debts remain theirs. If you wish you may agree among yourself who, upon separation, will be making payments towards which debts. You may want to document your agreement in writing.
Dealing with Credit Card Debt in a Divorce
If you have a credit card, you might be either a primary borrower under the credit card agreement or just be a supplementary cardholder/user. The fundamental difference between the two arrangements is whether or not at the time of issuing the card you accepted your responsibility to the credit card company for the charges that will be incurred on the credit card. If you did not agree/did not sign any documents, then you are not legally responsible for the payments towards the outstanding credit card balance. If you are a primary borrower then you may want to take steps to have the supplementary card canceled by the credit card company to avoid future charges on your credit card by your former partner.
You might be unsure about the circumstances of obtaining the card. If the credit card is listed on your credit bureau, it would generally mean that you accepted the card as the borrower and agreed to be responsible for the charges. The same applies if you see your name on the credit card statements. You may request the creditor to provide proof that you applied for the credit and/or accepted the credit card agreement.
As with other debts, upon relationship breakdown, credit card balances remain the responsibility of the person who applied for the credit card and/or accepted the credit card agreement. A separation agreement or divorce order may indicate how you and your former partner agree to divide payments for the credit card balances.
Personal Income Tax owing to the Canada Revenue Agency and Divorce
Subject to certain types of transfers of assets, the tax debt of one spouse does not pass on to the other spouse, neither during a marriage nor upon a divorce.
However, if a person has any ownership of property, not paying taxes to CRA may eventually result in CRA registering a lien on the title to that property. To do so, CRA does not require any court orders. The good news is that the lien will only apply to the tax debtor’s share of the equity in the property. In other words, the tax lien pertaining to one tax debtor cannot encumber the equity share of the other owners of the property.
During a divorce, selling real property is one of the most effective methods used to divide the equity between the spouses. If a lien was registered prior to the sale, then the share of the equity belonging to the spouse with the tax debt will first go directly to the CRA to satisfy the lien.
CRA has a mechanism to assess personal income taxes owed by one spouse on another spouse under provision section 160 of Canada’s Income Tax Act. Section 160 is triggered when anything of value is transferred for less than fair market value and it applies regardless of the recipient’s knowledge of the original taxpayer’s tax debts. Once the assessment is raised, the recipient (transferee) will have an opportunity to object to the assessment. To help you with the dispute, you may need the help of a tax professional.
Getting out of debt after a Divorce
Your financial situation might become worse after your separation and divorce, especially if you already struggled to stay on top of your debts during your marriage. This is largely due to the fact that you no longer share significant household expenses such as rent/mortgage and utilities and incur extra expenses due to moving, buying furniture, and spending on legal bills attributed to the divorce. You will also have to manage all these new expenses on a single income.
You should prepare a new budget as soon as possible in order to plan your expenses for living on your own. Be honest and realistic with yourself. If your debt load turns out to be too much to manage, consult a Licensed Insolvency Trustee to understand your options.
You should organize your financial paperwork, like creditor’s statements and income tax returns, and ensure you have access to it on paper or electronically. It is important that you notify your creditors and CRA of your new address. This way you won’t miss any important notices and correspondence and you will remain in charge of your financial affairs and not let them deteriorate.
Bankruptcy and Consumer Proposal: When to Deal with Debt and Divorce
If you find yourself unable to meet all of your obligations, and debt plays a significant role in them, you may want to get help with filing bankruptcy or a consumer proposal (“Insolvency proceedings”). Insolvency proceedings will help you to clear yourself from the burden of unsecured debts such as credit cards, unsecured lines of credit, payday loans, and bills that you can’t afford to pay. The Insolvency proceeding will also protect you against collection calls and legal action. These dealings may add significant pressure to your already very stressful situation.
People’s assets and income are integral to any Insolvency proceeding but they are also at the center of the marital breakdown process. Undergoing both proceedings at the same time is possible but the division of assets and support payment matters may get so intertwined that it may inadvertently complicate and even delay both or either one of the proceedings. Having said that, once you default on your debt repayments, creditors may begin legal enforcement actions. In this case, you may need to act quickly and file either bankruptcy or a proposal to legally protect your assets and income against creditors.
Once assets and debts are divided through divorce proceedings, you might have a clearer picture of your financial situation and be able to make a more informed decision about your next steps and the need for insolvency proceedings. You will also have a better understanding of your new living expenses and budgeting requirements.
In any case, contact a Licensed Insolvency Trustee for a tailored, free consultation regarding your options and timing of events.
Financial Responsibilities that Remain After Bankruptcy and a Consumer Proposal
There are certain obligations that you may have to meet after a divorce that a bankruptcy or consumer proposal cannot discharge, such as spousal and child support. This applies to both ongoing payments and arrears. Furthermore, neither bankruptcy nor consumer proposals can stop an obligation to continue to pay spousal and child support.
If you are owed arrears of spousal/child support and your former spouse filed a bankruptcy or consumer proposal, you might be able to file a claim in the proceeding and receive a payment up to a certain amount in priority to the other creditors.
Going through both bankruptcy and divorce will be difficult, but the insolvency process is an opportunity to put past debts behind you and start over financially. If you’re struggling to keep up with debt after divorce in Canada, book a free consultation with David Sklar & Associates to find out how you can start fresh. We’ll learn about the specifics of your financial situation and work with you on the right solution for your debt.