Dealing With & Avoiding Joint Debt Problems
When you and your spouse set out to make a life together, everything is shared.
Your happy memories, your home, your hopes and dreams.
But there are also less idyllic and romantic things that married couples share.
Such as responsibility and liability for debts you undertake jointly.
Sharing responsibility for debts usually means that you can borrow a lot more.
And while joint debt isn’t inherently a bad thing, neither should it be entered into lightly.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
Any kind of credit such as a loan or credit card should be entered into with eyes wide open, and when it comes to joint debt both parties need to be sure of their obligations before signing on the dotted line.
Whether you share a joint debt with your spouse, a friend or a family member, things can become complicated if your relationship with that person deteriorates or if their circumstances change significantly.
If, for whatever reason, you or they default on a debt it could result in serious consequences.
That’s why we’ve compiled this comprehensive guide which will tell you everything you need to know about dealing with and avoiding joint debt problems…
Why take out joint debts?
Joint debts can be very risky.
So, why take them out?
As we’ve stated previously, joint debts aren’t necessarily a bad thing.
Many couples take out joint debts because they can get access to more credit jointly than they could on their own.
Couples, family members and even friends take on joint debts for all kinds of reasons.
A group of friends or siblings may want to invest in a property together.
A married couple with no credit history may wish to apply for a joint credit card to build up their credit rating.
Or a couple with a college age son or daughter may co-sign their student loans.
Whatever the size or nature of the debt, your legal obligation remains the same.
You enter into a legally enforceable agreement with your creditors that both parties are responsible for all of the debt.
When taking credit card, loan or mortgage with a partner, friend or family member many assume that they’re only responsible for a proportionate amount of the debt.
“Their half” if you will.
Unfortunately, this reasoning (while understandable) is flawed and can lead to serious repercussions down the line.
Any joint debt remains the shared responsibility of both account holders.
That does not change until the debt has been repaid in full and the account closed.
Whatever should happen between you in the meantime, the unfortunate truth is that this does not change.
This also means that if you cosign on a line of credit for a family member or friend, you are legally responsible if they default on their payments.
Even if you are not responsible for incurring the debt itself, creditors can still demand payment from you because you co-signed.
Even if you co-sign a debt for someone who later disappears or dies, you assume responsibility.
The key thing to remember here is that if your name is on the contract, you are responsible for repaying the debt.
When joint debts go unpaid
Any debt should be entered into with a long term plan, and long term provisions in mind.
However, this is especially true of joint debts.
Our circumstances change, often in ways that we cannot preempt or plan for.
Our employers might go out of business.
We may get made redundant or get fired.
We may become injured or sick, and thus become unable to work.
When you take on any form of joint debt, the inherent risks are doubled.
Sometimes one party’s circumstances may change in ways that they had not expected and their co-signatory will be expected to pick up the slack.
This means that bitterly separated ex-spouses can still find themselves having to discuss the shared credit card bill.
Parents can be responsible for the student loans of kids they never hear from.
And loving spouses can have to take on two jobs to pay off debts if their dearly beloved gets sick.
Since both account holders are responsible for joint debts, their creditors are legally entitled to demand repayment from either party if repayment terms are not met.
The unfortunate truth is that creditors have little sympathy for spouses who cheat or become impossible to live with.
They don’t want to hear stories about black sheep siblings who betray the trust of co-signing family members who enter arrangements in good faith.
All they care about is getting their money back.
Whatever the circumstances, if a spouse, friend or family member fails to make good on their repayments, you are responsible for all making payments until the debt is settled.
If you’re unable to repay the debt, of if your co-signatory defaults on their payments it will likely have an adverse effect on your credit rating, even if you have other personal accounts in good standing.
Many are not aware of this, but a joint debt can also be cleared in bankruptcy.
At the very least, debts in arrears can have a long-lasting negative impact on your personal credit rating.
This is why you need to put our emotions to one side when entering into any kind of debt agreement with another person.
As soon as you sign on the dotted line, all of the debt will become your responsibility.
If the other party stops making payments, you’ll be expected to pick up the slack.
And if you can’t do this, you will have to face the consequences.
What if I get divorced?
Couples who get divorced may assume that once they have their divorce certificate that it will absolve them of any responsibility with debts shared with their ex.
Unfortunately, this is not the case.
Creditors are not bound by a divorce certificate.
Even if you are no longer in contact with your ex-spouse, creditors will still look to you for payment.
This is why it’s so important to cancel or freeze joint cards and accounts when you and your partner separate or file for divorce.
You wouldn’t be the first person whose ex went on a shopping spree on the joint card and left you with the debt.
When you are separated, you will have the option of managing your joint debt as part of the settlement, paying your shared debts together or separately.
Many separated couples use joint savings or equity on the formerly shared home to pay off any joint debts.
Alternatively, other shared assets such as cars or valuable belongings can be liquidated (sold) to pay off joint debts.
Alternatively, if you and your ex-spouse prefer to pay your joint debts separately, you have a variety of options available.
If, for instance, you share a debt on a joint credit card, you can request that the creditor divide the debt on the card evenly and transfer half of the total amount to new separate cards in each partner’s own name.
Please note that this is only an option if you qualify for the debt on your own.
Another solution may be to contact your creditor directly in writing.
Explain the situation and that you will pay an agreed percentage of the debt with the remaining amount to be paid by your ex-spouse.
It can then be arranged for your spouse to transfer the remaining balance of the debt to a new card or account in their name.
This makes them solely responsible for their portion of the debt.
This is obviously advantageous as it allows you to protect your credit rating as long as you are making good on your repayments for your portion of the debt.
But what if only one person incurred the debt?
If your ex-spouse incurred a debt for which you co-signed, it’s understandable that you may not want to be accountable for it.
However, the worst thing you can do is ignore the debt.
This can only have negative repercussions for you, and may seriously impact your credit rating.
The good news is that if your former spouse is willing to take responsibility for debts they incurred on a joint account or card, you may ask your creditor if your ex-spouse is eligible to qualify for the debt on their own.
If they are willing (and the person has sufficient income and credit standing, the debt can be transferred to a new account under their own name so that you no longer share the responsibility for it.
Once your portion of your shared debts has been repaid, you may need to take steps to establish your own credit.
You may need to set up a new savings or current account.
Be sure to keep a close eye on any shared debts and loans to which your name is still attached.
Even if your ex-spouse has assured you that they’ll take responsibility for them, you are still legally accountable.
What if the person sharing my debt dies?
The death of a partner, friend or family member can shake you to the core.
With so much to consider in the wake of their loss, it’s easy to forget about your shared debts.
Nonetheless, the sad truth is that creditors, while sympathetic to your loss, will nonetheless expect repayment.
While you may be an a very vulnerable state, you need to be proactive in this situation.
The longer you bury your head in the sand, the more damaging it can prove for your financial wellbeing.
You may have assumed that when a person passes away, their debts are forgiven, and most of the time you would be correct.
Whether the deceased is a parent, sibling, spouse or friend, in most cases you will not be held responsible for paying the debts of the deceased.
At least as long as the debts are theirs.
That is to say, held only under their name.
Unfortunately, when it comes to joint debt after death, the surviving account holder takes responsibility for all of the shared debt.
This is why a life insurance policy is absolutely imperative when taking on a significant debt (such as a mortgage) with someone else.
Indeed, some lenders will insist on taking out a life insurance policy as a condition of your mortgage.
If you share a debt with someone who has died, your number one priority should be to check if there is an insurance policy in place to pay off the debt.
If there is no insurance (or if insurance is not sufficient to cover the debt), your next action should be to contact your creditor or take a good look over your paperwork.
When you don’t feel that your income will be sufficient to meet your payment obligations, explain your situation to them.
They may be able to negotiate a payment arrangement that better suits your new circumstances.
It’s also important to make sure that no debt repayments are taken from the deceased account, as these will be frozen after notification of their death.
It’s quick and easy to rearrange repayments from your account.
When you’re dealing with shared debt left by a deceased loved one, it’s common to feel as though you are completely alone.
But you are far from alone!
There is help available to help you to better manage your debts.
Just make sure you choose the right help.
Struggling to deal with your joint debts? We’re here to help!
Since we opened our doors in 1999, we’ve helped over 100,000 Canadians from all walks to life to better deal with their debts, and lessen the strain they place on day-to-day life.
Unlike not-for-profit debt counselors, our Licensed Trustees can advise you on all the options available to you, rather than simply helping you to set up a debt management plan.
If you’d like to know more about our services, call us today on (877)879-4770 to arrange a callback.
Our callback service is completely risk-free, zero-obligation and 100% confidential.
It might just be the most important call you make this year!
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?