Understanding Joint Debts & Insolvency
Managing finances is an integral part of any relationship, and understanding the specifics of joint debts is crucial in maintaining financial stability. This article presents a thorough guide to joint debts, helping you to navigate the complex world of shared financial responsibilities.
Understanding Joint Debts
Joint debts are financial obligations shared by two parties, typically partners or spouses. When two individuals apply for a credit together or when one person guarantees the debt of another, a joint debt is formed.
The Mechanics of Joint Debts
Joint debts operate under a contractual agreement, signifying equal responsibility for both parties in repaying the loan. This means that if one party fails to meet their obligations, the other party is liable for the entire debt. This concept is known as ‘joint and several’ liability.
Before entering into a joint debt agreement, it’s essential for both parties to understand the risks involved. Both credit scores could be affected in the event of a default, as both are considered borrowers by the lender and credit bureaus.
Types of Joint Debts
Any form of debt can technically be a joint debt. This includes mortgages, car loans, lines of credit, and credit cards. However, different types of joint debts come with their own set of rules and implications.
Joint Credit Cards
Joint credit cards can be a bit complicated. When both parties sign the credit card agreement, they are equally liable for the total debt, not just their individual portions. However, with supplementary credit cards, the primary cardholder is usually responsible for the debt. It’s important to read the terms of the credit card agreement carefully to understand the division of responsibility.
Note: Each credit card comes with specific terms and conditions. Some may hold both the primary and supplementary cardholder liable.
Joint Bank Accounts and Overdrafts
Many couples maintain a joint bank account, which becomes a joint debt when it is overdrawn. An overdraft is considered a type of unsecured credit.
Co-signed and Joint Secured Debts
Secured debts like mortgages secured by a family home or a car loan where the car is collateral are common joint debts. If one party is unable to meet their payments, the lender can seize the asset and demand the remaining balance from the co-signer.
Spousal Debt Responsibility
Contrary to popular belief, marriage does not automatically make you liable for your spouse’s debt. The law treats financial contracts separately from marital agreements. Thus, only the spouse who incurred the debt is legally obligated to repay it.
Before agreeing to assume legal liability for your spouse’s pre-existing debts or applying for a joint consolidation loan, consider the implications carefully. If your spouse ends up defaulting, the lender will turn to you for full repayment.
Dealing with Joint Debt During Bankruptcy
If your spouse files for bankruptcy or a consumer proposal, you are still liable for any joint debt. Your spouse’s ability to make payments towards the joint debt will be suspended, and you will be pursued for full payment.
Managing Joint Debts in Insolvency Situations
Both spouses do not necessarily have to file insolvency to deal with joint debts. The need to file a bankruptcy or proposal depends on the financial situation of each spouse. However, if both spouses are struggling with debt, they may consider filing a joint insolvency proceeding to reduce costs.
Divorce and Joint Debts
In the event of a divorce, joint debts are not automatically divided in half. Both parties continue to be equally responsible for repaying the debt. Once the debt is fully repaid, it is vital to remove your name from it to avoid liability for future debt incurred by your ex-spouse.
Separation Agreements
Separation agreements do not absolve you of your legal obligations towards joint debts. Even if your ex-partner agrees to repay the joint debt, you will still be held responsible if they fail to make payments. It’s crucial to discuss the possibility of replacing joint debts with separate loans with your bank before signing a separation agreement.
Concluding Remarks
Joint debts can be a complicated aspect of finance, but with clear understanding, they can be managed effectively. If you find yourself struggling with joint debts, consider seeking help from a Licensed Insolvency Trustee. They can assist you in exploring the best debt relief options for you and your partner.
