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Dealing With Jointly-Held Debt In A Divorce

What Happens To Debt After A Divorce?

Here’s a scenario we see all too often: A happily-married couple stumble financially and, due to their rising debt load, legally separate. But just because a couple separate doesn’t mean their debt does, too. The problem that led to the split still exists: a rising debt load compounded by interest charges and late-payment penalties.

Debt when getting divorcedDivorce Debt: An Example

In this particular scenario the separation agreement states that Tania (not her real name) will get to keep the matrimonial home. In exchange, she agrees to shoulder the responsibility for all of the debt the couple has, including lines of credit, overdrafts on bank accounts and several credit cards. Michael (not his real name) moves out of the matrimonial home, confident his debt worries are behind him.

Unfortunately, finances are tough in the now-smaller household and Tania, juggling the demands of a new job and two school-age children, finds she cannot pay down the debts she promised she would in the separation agreement. Tania ultimately has no choice but to file for bankruptcy protection. She is able to clear her debts from her credit report by obtaining protection from her creditors with the help of one of our Licensed Insolvency Trustees.

Several months later, Michael starts getting “the calls”. You know the type of calls we’re talking about – the incessant collection agency phone calls early each morning and repeatedly throughout each day. Demand letters from the collection agencies begin to fill Michael’s mailbox, and his boss gets calls at work from one particularly-aggressive collector who tells him that “Michael is a deadbeat and refuses to pay his bills.

Michael has gone from married man with joint debt to single man without debt and eventually to a single man burdened by all of the debt from his now-dissolved marriage. Debt he thought the two of them had dealt with.

Joint-Debt = 100% Responsibility

Everyone’s debts are their own debts, and each of us has our own unique Social Insurance Number (S.I.N.) which the credit bureaus use to track what we owe and to what creditors we owe it. If Tania and Michael had kept all of their debts separate during their marriage, none of the debt they shared prior to their split would have come back to haunt the newly-divorced Michael. But because all of their credit cards, bank accounts, overdrafts and lines of credit were jointly-held, Michael is on the hook for 100% of the debts after Tania files for bankruptcy protection from her creditors.

Michael didn’t know which way to turn until Tania pointed him in the direction of our firm, and he met one of our Insolvency Trustees for a free, confidential assessment of his financial situation. Unlike his ex-spouse, Michael ended up filing a consumer proposal (a settlement offer to his creditors) and avoided Bankruptcy. He is now on his third year of payments and is confident he can start to pay down the outstanding balance owing on his proposal within the next few months, cutting down the length of time it will take him to finish is proposal and begin to rebuild his credit.

If you have a credit card with a supplemental card that your spouse uses (or a line of credit or bank account with overdraft protection on it), it’s likely one spouse would be 100% responsible for the total credit used on that card if the other spouse defaulted. That’s because a supplemental credit card traditionally has the same account number as the primary credit card, or is tied to the credit account in some other way. If your spouse has used that supplemental credit, they will be considered jointly responsible for all debts accumulated under that credit card account, just like Michael was.

And that separation agreement the lawyers drafted for Michael and Tania? It may not be binding in respect to debts in many cases (unless the creditors have agreed to the terms of the separation agreement). In most cases both spouses are responsible for the entire debt, despite what the separation agreement states the former couple has agreed to.

Keeping Debt Separate In A Household

By now the picture should be clear: If you share a debt, you share the responsibility for that debt. By keeping as much of your debt separate in your relationship, you can avoid financial problems later on if one of you flounders and cannot pay down your bills. And if you do run into a problem like Michael did, you know we are available to assist you.

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