Debt and Divorce: A Common Cause of Bankruptcy
There are countless things that cause Canadians to experience financial difficulty. Things such as job loss, poor spending choices and being a victim of fraud are just a few reasons behind Canadians’ financial troubles. Among these, a relationship change, whether that means a breakup, separation, or divorce, is one of the most common causes of bankruptcy.
Separation and divorce are very difficult things to go through, both emotionally and financially. There is no doubt that a relationship change leading to divorce carries long-term financial consequences. We hope this blog will provide a few answers to common questions surrounding debt and divorce:
Divorce and Debt Responsibility: What Am I Responsible for?
A separation agreement or divorce order, where a couple agrees to divide their debt and assets, is an important step towards a new start for both partners. The marital debt you accumulated during your relationship may have been affordable with you and your partner’s combined income. But once you’ve separated, it may quickly become clear that the debts are no longer manageable. You might ask yourself, “what am I responsible for?”
Did I Sign It?
The good news is that just because you were in a relationship does not necessarily mean you are responsible for the other person’s debts. Debt that the other person brought into the relationship does not automatically become your debt. It won’t have your signature on it and you did not benefit from it. It’s best practice to avoid co-signing or guaranteeing another person’s debt whenever you can. Remember, if a debt has your signature on it, you are responsible for it.
Know Your Rights
During a relationship, assets can be acquired and built up, but so can debt. Debts incurred during your relationship can be a lot more complicated. Getting legal advice from a lawyer who deals with family law matters is important to ensure each party gets information and guidance to help them through the process. We would recommend that you consult with one in order to discuss your rights.
Read the Fine Print
One type of joint debt to be aware of is secondary or supplementary credit cards. If you have one of these cards, it is likely that you will be responsible for the debt after separation. This includes not only the charges you make but also the charges made by your ex-partner if they are the primary cardholder. Always be sure to read the fine print.
Managing Joint Debts
It’s not uncommon for separation agreements and divorce orders to set out how you and your ex will pay back joint debt. But just because you have an agreement doesn’t mean things will be smooth sailing. When managing joint debts, it’s important to keep in mind that:
- Your agreement does not apply to your creditors. Agreement or no agreement, your creditors want their money back. If your ex-partner does not keep up with their debt payments as agreed, the creditors will seek payments from you instead.
- It’s hard to take your name off joint debt. Sometimes it is possible to get your name off of joint debt. If your ex-spouse has taken responsibility for a joint debt under your separation agreement, they will need to apply to the creditor to see if they take over the debt on their own. But this can be difficult to do. Creditors have no incentive to remove your name. If the creditor declines the application, the joint debt will remain the responsibility of both yourself and your ex-spouse until it is paid off.
Pro tip! If you agree that your relationship is going to end, consider applying for two individual loans in each person’s name. This is a safe way to equally pay off any joint debt. Use your individual loans to pay off any joint debt. This way, you are only responsible for paying off your individual loan and you won’t have to rely on your ex to pay off joint debt going into the future.
Who Keeps the House?
One of the biggest issues when it comes to debt and divorce is dealing with your mortgage. Faced with separation or divorce, it is often unclear how to proceed with such a large debt. Here are a couple of important things to know about what happens to your house when you separate:
- Renewing your mortgage. If either you or your spouse are in a position to continue with the mortgage, keeping up with these payments will protect any investment you have built up in the property. But be aware. When it comes time to renew the mortgage, your newly separated status may affect your eligibility to qualify for the mortgage.
- The “F” word. Some debts, such as mortgages, need to be paid in order to avoid foreclosure. If these debts are unaffordable after you’ve separated, secured creditors will take action to repossess your house. If the mortgage was insured by the Canada Mortgage and Housing Corporation (CMHC), they will become the creditor. Once foreclosure completes, you will both be on the hook for any remaining mortgage debt.
- Don’t wait to ask for help. If it’s clear that separation has made your mortgage unaffordable, don’t wait to seek help from a professional. In this case, applying for bankruptcy or a consumer proposal might be the best solution to deal with your financial burden. You do not have to wait until after the house sells to seek assistance.
In this podcast, Derek Chase discusses how financial stress affects relationships.
Contact Us for a Free Consultation
No one enters into a relationship thinking they will separate or divorce in the future. But people and circumstances change. Going through a separation or divorce can leave us feeling adrift and uncertain about our future. But having access to information that helps you make sound financial decisions can help ease this stress.
If you are experiencing financial difficulties related to separation or divorce, we encourage you to reach out to a financial professional to help you navigate this challenging process. At Chase & Associates, we specialize in helping you manage your debt and gain peace of mind when it comes to your finances. Contact us for a free consultation to learn more about your options.