It's an unfortunate fact: Nearly 40% of all marriages in Canada end in divorce, and while there are a number of reasons why it happens, financial issues are often cited as one of the main reasons for separation or divorce. It’s no surprise then, that many individuals and couples have questions and concerns about debt, divorce and joint debt when their marriage dissolves.
When possible, it’s always best to try to work out any debt-related issues and joint debt before the divorce. This eliminates most of the following questions. However, we understand not all divorces are amicable, and some can be downright nasty. When it’s not possible to settle your debt issues before the divorce happens, here are some answers to some common questions about debt and divorce.
8 Common Questions about Divorce, Debt and How Credit Counselling Can Help
Remember, every divorce and debt situation is different, so this should only serve as a general guideline. It’s always best to consult with a lawyer when it comes to matters involving the law, and then speak with a certified Credit Counsellor for personal debt advice. At Credit Canada, we have certified Credit Counsellors who can help in this area.
1. Are you responsible for your spouse's debt?
Ideally, a couple will have split up their debts prior to the divorce and made arrangements to pay them down individually. If they haven't made arrangements, then legally, debt resolution or repayment will be up to the courts, which may determine the debt be split between each spouse.
But from a lender or creditor's perspective, this doesn’t matter. The person who borrowed the money is the person responsible for paying the debt. Even if the debt is under one spouse's name, but the other spouse spent the funds, it doesn't matter to the creditor. The person's name on the account is the person responsible for paying back the debt. And if they don't, it's their credit rating and credit score that will be impacted.
If debt payments continue to be paid following the divorce, then the debt won't be an issue. But if payments fall behind, simply stating that an ex hasn’t paid their fair share will not matter to the creditor or lender. They expect payments to be made on time by the person whose name is on the account, whether the debt is theirs or not.
2. Can individual debts be shared in a divorce?
They can be. Ultimately, the courts will determine how to divide marital debt in a divorce. But again, this doesn't matter to the creditor or lender. They want to be paid regardless of who "technically" owes the debt. For them, the person who borrowed the money is the responsible party, and they will reach out to that person in order to collect on the debt. If the debt isn't paid in a timely matter, it's that person's credit rating and credit score which will be impacted.
3. How is credit card debt split up in a divorce, and what happens to joint credit cards?
We hate to sound like a broken record, but this too is up to the judgment of the courts. The creditor or lender, again, will expect payment from the original borrower. But there are some things to be sure to do, such as figuring out names on credit card accounts. For example, if you are the primary cardholder on a credit card account and your spouse is a secondary cardholder, have your spouse removed from the credit card account as soon as possible, so they can no longer add more debt to the account. (You of course will be responsible for paying the balance on the account.)
For joint credit card accounts, the best thing to do is to contact the lender to freeze the account so no more charges can go through—only payments will be accepted. Keep up with minimum payments until the courts can address repayment of the debt. You could also pay off the entire debt or transfer the balance to a new account in your name alone. But remember, the lender will hold you 100% responsible and it may have an impact on court proceedings. Your best bet is to seek out legal advice.
4. What do you do if you have paid off your half of the debt according to your divorce agreement but your partner hasn't?
This is a question for your lawyer, who may take the case back to court to find a resolution to your grievance. But in the meantime, to prevent the debt from going to collections and damaging your credit score, it might be a good idea to continue to make the payments (if you can afford to do so) until the matter can be resolved by the courts. Just be sure to keep a record of all the payments you make that were not necessarily your responsibility.
5. What happens if debt that you were unaware of is discovered? Can you be responsible for it?
Prior to the divorce proceedings, each person should pull their credit report from TransUnion and Equifax and share this information with their partner. Financial transparency is not only important during a marriage but also during a divorce. This way, there are no secrets and you won’t be caught off guard by undisclosed debt when things are being finalized. If one or neither partner wants to do this, things will eventually shake out, but it can get messy. But again, if the debt is in your name, even though your ex took it out and used the funds, the lender or creditor will come after you and you will be responsible for paying it back; otherwise, it's your credit score and credit rating on the line.
6. How are secured debts treated in a divorce?
Secured debt, such as a mortgage or auto loan, is different from unsecured debt, such as credit cards or a line of credit, because there's an asset attached to secured debt. If you and your soon-to-be ex are on friendly terms, you should consider selling your home and splitting the money. It’s the cleanest solution. Another option is to buy out your spouse, or vice versa. Of course, you can let the courts decide for you, but neither one of you may be satisfied with the outcome. With auto loans, the best strategy is to speak with the lender about refinancing the vehicle under just one of the spouse's names.
7. What happens to joint debt if my ex files for bankruptcy?
Almost one in five insolvencies in Canada involve someone who has been through a divorce. This is partly due to there now being two households trying to live off of the same income that only one household was living off of prior to the separation. If there is joint debt and one of the two spouses files for bankruptcy, the other spouse will become responsible for the entire debt amount and the lender or creditor will shift their focus to them. How bankruptcy may affect other areas, such as child support, etc., is a question best suited for a lawyer.
8. How can I protect myself from debt during a divorce?
If each party wasn’t living within a budget and/or wasn't transparent about their finances prior to the divorce, it’s more difficult to protect yourself at this stage—especially if you and your soon-to-be ex are not on good, or at least civil, terms. The best things you can do have already been covered: remove your spouse as a secondary cardholder on any credit card accounts; freeze joint credit card accounts, so no more charges can be made, but keep up with minimum payments until the courts can address repayment of the debt; sell your home and split the money, or buy your spouse out; and refinance vehicles under just one person’s name.
How Credit Counselling Can Help with Debt in a Divorce
When dealing with joint debt or debt resulting from a divorce, your first step should be to speak with your lawyer to get a sense of what to expect financially. It’s possible to speak to a lawyer for up to 30 minutes at no cost through organizations like the Law Society of Ontario to learn about your rights and options. (Check your province for similar services if you do not already have legal counsel.) Next, book a free appointment with a certified Credit Counsellor at Credit Canada to review your personal financial options. We can cover common questions, like:
- Will you be able to afford housing?
- Will you be able to afford a vehicle?
- Will you be able to manage day-to-day expenses?
- Will you be able to manage debt payments on your own?
- Will you be able to manage child support, legal fees, etc.?
Debt Counselling Before Getting a Divorce
When possible, we like to speak with both partners together prior to a divorce to help each of you make sense of your finances. When that’s not possible, we are more than happy to speak to both partners separately. If one of the two spouses is not interested in speaking with a Credit Counsellor, we can speak with just one of you. However, in these cases we can only discuss debts that are in the individual’s name, for privacy reasons. During this free and confidential session, we can review your finances, talk about money management and budgeting going from a double income household to a single income household, and even discuss the possibility of a Debt Consolidation Program if it makes sense for your particular situation.
Don't Face Debt Alone During and After a Divorce
Getting divorced is a very tough and stressful time, and worrying about finances is natural. However, you don't have to go through it alone. While it’s never easy to discuss these matters with a stranger, at Credit Canada, we’ve talked with thousands of people in situations that are probably very similar to your own, and we can put you at ease. And, if you’re recovering from a divorce but now struggling to manage your debt payments and/or regular monthly expenses, we can also talk about how to get out of debt. All of our counselling is free, confidential and judgment-free; we simply want to help. Give us a call at 1.800.267.2272 or contact us online. We’re here for you.