How Does Divorce Impact Debts?
In today’s world, approximately 40% of marriages in Canada reach an unfortunate conclusion – divorce. Among the myriad of reasons leading to this, one significant contributor is financial instability. Consequently, questions revolving around debts, joint liabilities, and their implications upon divorce are commonplace. Ideally, such matters should be addressed prior to the divorce proceedings, but the reality often unfolds differently. Hence, this article aims to shed light on the question: “Does debt get split during divorce?” and offer advice on how to safeguard oneself during such challenging times.
Understanding Debt Division During Divorce
The division of debt during divorce is dictated by several factors. The situation is no different for couples who aren’t married but have lived together in a common-law relationship for a minimum of two years. By law, property is categorized as family property or excluded property based on what was accumulated throughout the union.
In a perfect scenario, the couple would divide their debts mutually. However, if this isn’t feasible, the responsibility of debt division falls upon the court. Importantly, creditors and lenders are unconcerned about how the debt is split. They hold the person who initiated the debt accountable for its repayment. If the repayments aren’t made, the credit report of the responsible person is negatively affected, regardless of the spouse’s contributions.
In Canada, the court usually determines the splitting of marital debt.
Preparing for Debt Division During Divorce
There are specific steps one can take to streamline the process of debt division during a divorce. First and foremost, investigate the names tied to any debt accounts. If you’re the primary account holder for a credit card, and your spouse is a secondary cardholder, it might be wise to remove them from the account, preventing them from accumulating more debt that you would be responsible for paying.
For joint accounts, it’s advisable to communicate with your lender to freeze the account, preventing further debt accrual. Meanwhile, ensure to make at least the minimum payments on any debts while waiting for the court’s decision on debt division. In such circumstances, consulting a Licensed Insolvency Trustee can provide valuable advice on managing your debts during separation.
Dividing Secured Debt During Divorce
Secured debts, unlike unsecured ones, are handled differently during divorce due to the involvement of assets. If the separation or divorce is amicable, selling joint assets like property and vehicles may be considered. The proceeds can then be divided for a quick resolution. Alternatively, one partner can buy the other out. If these options aren’t viable, the court’s intervention may be required, which could potentially lead to outcomes not agreeable to either or both parties.
For financed or leased vehicles, a discussion with your lender can provide insight on how to refinance in either your or your spouse’s name.
How Does the Court Decide on Debt Division?
The court considers multiple factors when deciding how to divide debt. In most cases, it will split the debt equally unless it would be unjust for one spouse. These factors include:
- The duration of your relationship;
- The presence of any signed and witnessed agreements;
- The origin of the debt;
- The value of the debt in comparison to the value of the property;
- Each spouse’s capacity to make repayments on the debt;
- If one spouse increased the debt or decreased the property’s value post-separation or divorce.
To claim a debt division, you must apply no later than two years following an order for divorce or annulment if you were married. If you were in a common-law relationship, you must apply within two years of the date of separation.
Addressing Non-payment of Debt by Your Spouse
The situation can become complex if your spouse isn’t paying their share of the debt as dictated by your divorce agreement. The primary solution to this problem is to consult with your lawyer. The case might need to be taken back to court for resolution. However, to avoid additional complications, continue making debt payments if you can afford to do so. This can prevent collection calls, legal actions like wage garnishment, and any negative impact on your credit report. Always maintain a record of all debt payments made, even if they aren’t part of your responsibility, until the situation can be appropriately resolved by the court.
Dealing with Undisclosed Debts
Discovering undisclosed debts from your spouse during divorce can be alarming. Before proceeding with the divorce, both partners should request their credit reports from TransUnion and Equifax and share them with each other. If any additional debts are discovered, the person whose name is associated with the debt will be held accountable for its repayment.
If you find yourself in this situation, seek advice from a reputable Licensed Insolvency Trustee for guidance on handling the debt.
Protecting Yourself from Debt During Divorce
While each divorce case is unique, there are general precautions you can take to protect yourself from debt during divorce:
- Remove your spouse from being a secondary cardholder on any credit accounts;
- Freeze any joint credit cards to prevent additional spending;
- Continue making minimum payments on joint accounts until the court decides how the debt is to be repaid;
- Sell your property and divide the funds, or buy your spouse out;
- Refinance any vehicles under either your or your spouse’s name;
- Inform your creditors about your separation from your spouse;
- Discuss any joint accounts with your bank and learn how to protect your money;
- If possible, reduce any overdraft limits, and modify your joint accounts to require two signatures for fund withdrawal;
- If your spouse is the beneficiary of your investments, RRSPs, insurance, and will, consider making changes.
The Implication of Bankruptcy on Joint Debt
In Canada, a significant portion of bankruptcies are filed by individuals who have undergone a divorce. This is primarily because the expenses previously shared by two individuals are now the responsibility of one.
If there are any joint debts and either you or your spouse files for bankruptcy, the remaining partner will be held accountable for the entire joint debt amount. The lender or creditor will then focus on that individual for repayment.
Conclusion
At Bankruptcy Canada, we understand the complexities and stresses associated with divorce, especially when debts are involved. Our experienced Licensed Insolvency Trustees have been assisting Canadians for over thirty years. We are here to help answer your questions like “Does debt get split during divorce?” and guide you through each step of the process. Book a free consultation today—you owe it to yourself.
