Understanding Financial Liability in Marriage: Who is Liable for Marriage Debt?
Marriage brings two individuals together, not only emotionally but also financially. As such, understanding who is liable for marriage debt can often be a grey area for many couples. This article aims to provide an in-depth insight into the nuances of debt liability within a marriage.
Entering Matrimony with Debt
Entering a marriage does not automatically make you liable for your partner’s previous debts. The legal system treats financial contracts as separate entities from the matrimonial agreement. The responsibility of repaying a debt lies solely on the individual who has signed for and incurred the debt. Thus, debts under your name remain your responsibility, while your spouse’s debts remain theirs.
Note: It’s important to deliberate thoroughly before deciding to shoulder your partner’s debt. While it’s crucial to discuss each other’s financial situation and develop a collective budget, there’s no legal obligation for either party to assume the other’s existing debts post marriage.
Newly Incurred Debt: Joint or Personal
New debts incurred after marriage can be either personal or joint. Just like premarital debt, your marital status doesn’t automatically make you liable for a debt incurred by your spouse post marriage. You can only be held legally accountable for a debt if your signature is on the agreement.
Lenders may:
- Require both spouses to sign a loan agreement as co-borrowers.
- Allow one spouse to borrow if the other agrees to cosign or guarantee the debt.
- Permit each spouse to procure and assume individual personal debt.
If you cosign or guarantee debts, the lender can turn to the second spouse for repayment if the first one fails to make the payment. These types of debts are often referred to as joint debts as both spouses are obligated to repay the entire loan.
Marital Assets and Marriage Debts
A common concern amongst couples is the fate of marital assets, such as a home, if debt repayment becomes an issue. If the debt is secured, like a mortgage or car loan, and the repayment defaults, the creditor has the right to seize the asset or collateral that was provided at the time of the loan agreement. Therefore, before consolidating spousal debts with a joint consolidation loan using home equity, it’s essential to consider the implications thoroughly.
When it comes to unsecured debts like credit cards or tax debts, an unsecured creditor may obtain an order from a judge allowing them to place a lien on a debtor’s property, including the marital home. The Canada Revenue Agency can place a tax lien on the debtor’s property without a court order.
Spousal Debts and Credit Score
One spouse’s credit score, whether good or bad, does not directly impact the other spouse. Your credit report lists credit accounts under your name and provides a record of your credit history. Only accounts you have legally signed for will be included in your credit report and will affect your credit score.
If one spouse is considering bankruptcy or a consumer proposal due to high debts, remember that the law treats each spouse as a separate individual. While one spouse may need to file for bankruptcy, it doesn’t mean the other spouse has to do the same. One spouse’s bankruptcy or proposal does not affect the other spouse’s credit report.
Addressing Debt: Jointly or Independently?
A typical marriage sees a mix of debts: personal existing and new debts for each spouse, and joint debts incurred post marriage. Starting a marriage with debt is not a catastrophe, but it’s essential to prevent financial issues from leading to relationship strain. Open communication and a commitment to work together towards debt repayment is the key to building a financially stable life together.
Here are some strategies for handling marriage debt:
- Develop a repayment plan before incurring debt.
- Create a family budget.
- Delay major purchases or starting a family until the debts are addressed.
- Think twice before cosigning your spouse’s premarital debts.
- Avoid opening a joint bank account at a bank where one spouse has outstanding debt.
- Discuss any decision to take on new debt together.
- Consider a pre-nuptial agreement to safeguard assets in case of marital breakdown.
If after marriage, one or both spouses find themselves in severe financial difficulty, it’s time to review your debt management options.
Debt Relief Options
Married couples have the same debt relief options as single individuals, with the added choice of handling them together.
Refinance or restructure your debt to make it more manageable. Consider whether it’s worth putting up family or jointly-owned assets as collateral or to cosign a new loan to support unsecured loans of only one partner. Remember, if you’re not liable today, you will be if you cosign or guarantee your spouse’s debt.
One or both spouses can file a consumer proposal or bankruptcy to deal with their debts individually.
The couple might have the option to file for joint debt relief.
Successful navigation of marital debt issues requires open communication and exploration of options. For advice on how to manage debt, consider scheduling a free, confidential consultation with a Licensed Insolvency Trustee.
