Dealing With Debt In A Common-Law Relationship
The number of common-law relationships in Canada is increasing.
The latest census information states that more than 20% of Canadians are in common-law relationships.
While common-law relationships are treated differently to marriages in the eyes of the law, issues with debts can still affect couples regardless of whether or not they’re married.
It can cause a lot of stress in a relationship, as well as on the individuals involved.
Read the following information to find out more about dealing with debt in a common-law relationship.
What is a common-law relationship?
The recognized definition of a common-law relationship varies from state to state in Canada, but effectively, it means being interdependent partners in a relationship.
Couples in common-law marriages are those that have been living together for several years, and might have children together.
The Federal Government has a clear definition of a common-law marriage.
Under the Income Tax Act, you are considered to be in a common-law relationship if you have been living together for 12 months.
When you file your income tax, you must do so based on this condition.
Common-law relationships and debt
Debts can be individual, or they can be joint.
To be considered jointly responsible for your common-law partner’s debt, you will meet one of the following conditions:
A joint applicant or a co-borrower
If you and your partner have taken out credit together, such as a mortgage, then you are both responsible for this debt.
A co-signor is someone who provides security to the lender by acting as the back up for the borrower.
If, for any reason, the debtor can’t make repayments, then it is up to the co-signor to do so.
A supplementary or secondary cardholder
When you take out a credit or store card, a second person can be given a card that is linked to the same account.
This makes you an ‘authorized user’, and could make you jointly responsible for debt that is built up on the account.
It’s important to check the terms and conditions before you take out the product, as different lenders will state different responsibilities for additional cardholders.
Before agreeing to anything credit-related with your partner, make sure you understand what your responsibilities are and whether debts become yours to pay if your partner cannot make repayments.
Common-law relationships and insolvency
While the largest number of joint insolvency claims are filed by married couples, there is a growing number of common-law relationships taking this action.
Debt can cause issues no matter what type of relationship you’re in.
Whether you’re married or you’re living with your partner, you could find yourself struggling to pay your debts, which can lead to a lot of stress and hardship.
Some typical questions from those dealing with debt in common-law relationships include:
Will my partner be affected if I make an insolvency claim?
It’s important to stress that your debts don’t automatically become your partner’s debts.
Typically, it’s the credit you apply for together that becomes a joint responsibility.
Whether this is a mortgage, a loan or car finance, you are both responsible for this debt.
Your partner will also not be responsible for any pre-existing debts you’ve built up.
Will my poor credit score affect my partner?
All credit records are individual, but both can be affected when taking out credit together.
Credit ratings work on an R1-R9 basis, with R1 being considered ‘excellent’ based on your credit behaviour.
If you fail to make payments on your joint debts, both of your credit ratings will be affected.
When it comes to applying for joint credit, a difference in credit scores can affect your borrowing.
This is because both scores will be taken into account together, and a lower average score will count against you.
This could mean higher interest rates or that you are able to borrow less than you would if you had a better score.
What happens if my partner files a consumer proposal or for bankruptcy?
If it comes to the point where your partner has no choice but to file a consumer proposal or bankruptcy, it is likely to be a difficult time for your relationship.
And while you’ll be there to provide support during this time, legally, that’s where your responsibility ends.
Provided you’re not a co-borrower or co-signatory, you won’t have any responsibility for paying your partner’s debts, nor will it affect your credit rating.
As part of your partner’s duties for filing for a consumer proposal or bankruptcy, they may need to declare their income and outgoing to a Licensed Insolvency Trustee, but you will not have to fulfil these obligations.
Talk to your partner about your finances
Conversations about money are never easy in a relationship.
But being open and sharing your concerns can help make your relationship stronger, and avoid serious problems down the line.
Debt can cause a lot of stress in a relationship, especially if you’re unable to make payments.
Being honest with your partner can help you find a solution and build a strong future together.
If you’re struggling with your debts and need to talk to someone about them, Bankruptcy Canada can help.
By speaking to a Licensed Insolvency Trustee about your issues, you can make sure you get the advice you need to make the right decision for dealing with your debt.
Your trustee might recommend action such as a debt management plan or a consumer proposal, which is something you can discuss with your partner.
Picking up the phone is the first step towards clearing your debt.
You can call us on (877) 879-4770 to arrange a free consultation and talk to someone about your debt problems.
The sooner you act, the sooner your situation will improve, so get in touch today and let us help you become debt-free.