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  • Debt After Divorce: Is Debt Management The Answer?

    by:
    Anna Guglielmi

    Debt is often the catalyst for many separations and divorce. In fact, financial issues are cited as one of the main reasons for divorce according to Stats Canada. Many of the debts you brought into the relationship, and the joint debts you’ve accrued while together, don’t just disappear after a divorce is finalized. How can you handle the rising costs, and the withdrawal of an income to help pay the bills?

    Combine this with the emotional turmoil that usually comes with a separation, and you have the makings of a downward spiral. It doesn’t have to be, though – you can take charge of your finances, and make sure your debts are separated from your former partner. That way, your credit score isn’t affected, and you can set yourself up for success going back into the world solo.Let’s go into what you need to know about divorce and any combined debts you have as a couple, and how you can avoid your credit score from being affected with proper debt management.

    The Financial Repercussions of Divorce

    Getting divorced can be expensive (ranging anywhere from a few thousand to hundred thousand dollars), especially depending on whether the separation is contested or uncontested. Separation means you live apart – it doesn’t end marriages. You must go through the court to officially end a marriage.

    Regardless of the circumstances, it hurts to separate – from the couple to children involved – and finances are probably the last thing on your mind. But you still need to evaluate the individual expenses you owe, and then factor in the joint expenditures you shared. These can include:

    • Credit cards
    • Bank accounts
    • Insurance policies
    • Investments
    • Tax free savings accounts (TFSAs)
    • Mortgages

    Why is this so important? Because both parties in a divorce are 100% liable to pay joint debts. The bank does not view your divorce as a 50/50 split for joint accounts – if you have $8,000 of accrued credit card debt, for example, you don’t just split it and pay $4,000 and $4,000 each. If your former spouse doesn’t pay on a joint account with your name still attached to the account, your credit score will be negatively impacted.

    Here are a few tips on how you can (financially) protect yourself during the divorce process:

    Cancel Any and All Joint Accounts

    Close any and all accounts that have both your names on them, or take the other person off as an authorized user. Make sure to submit your requests to any applicable accounts in writing that you’ll no longer be liable for future purchases.

    Explore Your Financial Options

    Every couple is different in how they make arrangements for bills and child support payments. Be sure to consult with an experienced attorney or insolvency specialist before signing anything permanent.

    You can decide to split the bills, but you must first make sure your creditors are notified, agree, and provide you with a written agreement. Otherwise, you could still be contractually obligated to your creditors to pay debts that were “split” in your divorce.

    Another option is creating two separate loans to pay off the debt. That way, everything’s cut and dry, and you know exactly what’s owed, and nothing’s attached to your name that you’re not aware of. But before considering this option it’s important you speak to an expert so you know exactly what you’re getting into.

    Open up Your Own Account(s)

    Consult with your creditors and have any balances transferred to your own account. If you don’t have an established credit history, you may run into some roadblocks here, but speak with your creditors first and see what your options are. The sooner you start building your own credit, the better.

    Consider Your Insurance Needs

    Once a couple splits, if you had joint policies before, you’ll need to get covered on auto, home, and even life insurance. If kids are involved, ensure their needs are also being met and fulfilled. If you can’t do this civilly, it’s wise to have a mediator present to arrange finances and develop a personalized plan for you and the children.

    Handling Mounting Debts After Divorce

    Even if you follow these tips to a tee, it won’t guarantee a clean break, or even a debt-free one. Switching to a one-income household can cause huge obstacles and increase your own personal debt to a point where you can’t pay it down on your own. It’s easy to feel lost and hopeless, and as if bankruptcy is your only option.

    Before turning to a consumer proposal or declaring bankruptcy, find out if a credit counsellor can help. Many times, depending on the nature of the debt, you can arrange an actionable solution that helps you move past the debt, and not get buried after the divorce.

    Note: Bankruptcy doesn’t wipe the slate clean on everything – you will still need to pay alimony and child support, if applicable.

    What you need to know about debt management and debt consolidation:

    • It can help if your personal debts have risen above what you can realistically pay with your income alone
    • Programs are customized to fit your needs
    • It involves helping you manage unsecured debt, which includes credit card debt
    • Counsellors help you make better informed financial decisions to set you up for success

    Is debt management right for you? It’s important to factor in your divorce or separation, as well as all related expenses, such your legal expenses. Find out more about getting your debt under control and restarting your life with a Free Debt Assessment. And we’ll help guide you toward a better, debt-free future.

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    Topics: Couples and Money

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