From wedding vows to warning letters, divorce debt can turn a breakup into a long financial battle for separating couples. As many Canadians walk out of court still tied together by credit cards or huge loans, this article looks at how divorce debt happens, who is responsible, and what options exist to resolve outstanding debts. For topics not covered here, consult a family lawyer in your province.
How does divorce debt happen?
Divorce debt usually starts with everyday borrowing while the couple is still together, whether in one or both names. As loans and other debts accumulate, the question becomes who is responsible if the couple separates.
Canadian family laws set rules for how couples deal with divorce debt. Provincial family laws, however, largely govern the division of property and debts.
What happens to family debt or a spouse’s debt in divorce?
Jonathan Robinson, a Toronto-based partner at McCarthy Hansen & Company LLP, shares insights into family and divorce debts in the context of Ontario’s family law.
As to what happens in a spouse’s debt during a divorce, Robinson says that “[u]sually, both spouses’ respective debts are accounted for through the equalization of net family property, [which] is:
- a process designed to ensure that the growth of the family assets over the course of the marriage is shared equally
- includes an accounting of each spouse’s debts incurred during the marriage
“Although the equalization process is very rigid and regimented under the [Ontario’s] Family Law Act (FLA) and one that the courts will follow in nearly all circumstances, one important exception concerns a spouse’s debts,” Robinson says.
He adds that in exceptional circumstances, a spouse’s debts might be grounds for an unequal division of net family property if either:
- debts at the time of marriage were not disclosed
- the debts were incurred recklessly or in bad faith
- a spouse incurred disproportionately larger debts to support the family
“Only rarely, however, does a court make an order for unequal division,” he notes.
Watch this video for tips on what to do in cases of a divorce debt:
If you need help with divorce debt, reach out to the best family lawyers in Canada as ranked by Lexpert.
What is and isn’t considered divorce debt?
Generally, you are not responsible for your spouse’s individual debt when you separate or divorce. However, there are exceptions under contract law and provincial divorce laws.
These exceptions depend on several factors:
- whose name is on the debt
- whether the debt is through a joint account
- what the provincial family law says about sharing the family debt and family property
This is why consulting a local family lawyer is the best way to address debt issues during divorce.
We’ll further discuss the exceptions below:
Exceptions: Loan contracts
Generally, a lender can only collect from the person who signed the credit agreement or contract. However, this rule makes a distinction in the case of spouses:
- if both spouses signed the contract: the lender can collect from either or both spouses for the full amount of the debt
- if only one spouse signed: the creditor can only pursue that spouse, even if the other spouse or the family benefited from the money
Most provincial family laws may treat many of these debts as family debt to be shared between spouses upon separation, even if only one name appears on the account.
Joint debts
Joint debt exists where both spouses signed or co–signed a debt altogether. This is common with the following contracts:
- mortgages
- joint lines of credit
- joint credit cards
In a joint debt, both co–borrowers are fully liable for the entire amount. If one stops paying, the lender can pursue the other for the full balance, even during or after divorce.
Joint debts often make up the bulk of divorce debt, which can complicate separation. As a precaution, spouses should understand what they’re getting into. In case the mess is already there, it’s important to immediately consult a family lawyer.
Exceptions: Provincial laws
While divorce proceedings are federally governed by the Divorce Act, other related matters such as divorce debt and property division fall under provincial family laws.
Example: British Columbia (BC)
Under BC’s family law, family debt or any debt that either spouse took during the relationship is generally shared equally between them. Just like joint debts, this includes:
- mortgages
- lines of credit
- loans from family members
- taxes
- repair bills
- debts after the separation if used to maintain family property
For family law purposes, it does not matter whose name appears on the account. A debt in one spouse’s name can still be considered a family debt and shared equally during property division.
However, BC courts can divide family debts unequally if an equal split is unfair. They will look at several factors, including:
- how the debt was incurred
- whether the family debt is greater than family property
- each spouse’s ability to pay
- what happened to the debt after separation
As for common–law couples in BC, or those who lived together in a marriage–like relationship for at least two years, they will be treated like married spouses for the purposes of family properties and debts. The law still assumes equal sharing of family debt, even when the creditor can only pursue the person who signed the loan agreement.
Example: Alberta
Here’s a video which showing how divorce debt works in Alberta:
Looking for law firms near your area to help with divorce and separation? Check out our directory of the Lexpert-ranked best family law firms in Canada, which can be filtered per province.
How can a spouse financially protect themselves during a divorce?
Aside from getting a premarital agreement, there are several ways to protect yourself from divorce debt. “Limiting the ways a former spouse can incur debt in your name or joint names is something to consider,” says Robinson. “But it is not always advisable – a lawyer can help you determine if action is required.”
He adds that other considerations, including:
- severing joint tenancies to real property
- revisiting the terms of a will
- tracking spending made on a former spouse’s behalf or toward joint expenses
“Of course, financial issues can arise in any number of ways, expected and unexpected, in a separation. Not all of them can be ‘fixed’ easily or economically, so a cost-benefit analysis is critical and should be revisited as circumstances change,” Robinson says.
He also provides other tips when dealing with divorce and debts:
- avoid fights about child support and equalization where possible
- reasonable concessions are often economically worthwhile in addition to paying emotional or psychic dividends
Separation agreements
Aside from divorce orders, separation agreements can divide responsibility for debts between spouses. For example, one of the spouses can agree to take over a joint card or any other joint debt.
However, these kinds of agreements are between the spouses only, so it does not change the lender’s rights over the debt. If the spouse who promised to pay stops paying, the lender can still target the co–signer.
How can lawyers help with divorce debt?
Here are some ways lawyers help couples when it comes to divorce debt, according to Robinson:
- Prioritizing legal issues: “When spouses are dealing with significant debts as they separate, a lawyer can help sort out which issues should be easily resolved with minimal fuss, and which will require more work. Not all debts are treated equally; a lawyer can help prioritize which debts require more attention and which are likely ‘baked into’ the standard equalization process.”
- Debt equalization: “At other times, debts may seem to hinder an outcome one or both spouses would like to achieve. An experienced lawyer may be able to propose alternative routes to the same general end. If the debts are exceptional, a lawyer can assess whether unequal division is appropriate. Similarly, if one spouse is unreasonably exacerbating debts post-separation, the intervention of counsel may be required.”
Divorce debt: From “I owe you” to “I’m okay”
Divorce debt can feel overwhelming, but it does not have to be permanent. With the right legal help, divorce debts – including joint loans and family debts – can be resolved. Consulting with a family lawyer is a good first step toward a more stable financial future after separation.
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