We walk into marriages, bear children, and accumulate property and debt with the intention of growing old together. However, the fact is that 40% of marriages in Canada end up in divorce. Couples incur debt to buy properties like cars and homes, to build businesses, in the form of judgments, fines, and taxes, and for their daily needs like credit card debts. They can also come into the relationship with debt such as student loans. Couples have to decide on how to split this debt during the divorce process. Here is a guide of how debt is handled during a divorce.

What happens if we cannot agree on how to split the debt?

The best way to decide on how to split the debt is through mutual agreement. The creditors only know the person who has signed on the dotted lines and expect both parties to pay joint debts. Both parties can decide on which debts each party will take up. In most cases, personal debts such as student loans are paid by the person who took them. It is also important to note that agreements by couples are not legally binding.

However, it is not always possible to reach an agreement – divorces can be very messy emotional rollercoasters. This is where the courts come in. The court will decide how much debt each party should take up.

How is property and debt calculated?

Under Canadian law, debt plays a significant role when dividing marital property. The Family Law Act of Ontario has a property division scheme that seeks to share debt based on the net values of the spouses at the time they separate and at the time they married with the aim of dividing any increase in the respective net worth equally.

To determine net worth, the debt incurred by either spouse is subtracted from the value of the property. As an example, if the wife has jewelry worth $20,000, but borrowed $5,000 to buy a particular diamond necklace, the net worth of the asset is $15,000. If the husband has a net worth of $300,000 and the wife $200,000, then the husband would have to pay the wife $50,000.00 because of the $100,000 difference in net worth to equalize their respective net family properties. The formula incorporates the respective debts.

Is debt to family shared?

A divorce and family lawyer in Toronto must scrutinize alleged loans from parents and siblings. Courts have in the past ruled against attempts to introduce debt to family when calculating what each party owes. Where there is no concrete evidence that the debt was an actual loan, courts have taken the money to be gifts and not loans.

How does bankruptcy affect joint debt during a divorce?

Both parties are responsible for paying off joint debts. If, however, one party files for bankruptcy, creditors will expect the other party to make full payments on the remaining joint debt. If one party files for bankruptcy to eliminate debt, the creditors can go for the other party to recover the money.

To protect yourself in case your partner files for bankruptcy, consider asking the lender to remove one of the spouses from any debt they might have guaranteed or co-signed. You can also ask the lender to split the debt into 2 different loans.

Note while bankruptcy eliminates unsecured debt, it does not eliminate child and spousal support payments as per the Bankruptcy & Insolvency Act. When considering bankruptcy and consumer protection, remember that they will adversely affect your credit rating for a long time.

How are secured debts treated in divorces?

Secured debts like car loans and mortgages are treated differently compared to unsecured debts like lines of credit and credit card debts because the former have assets attached to them. You can arrange with the lender to move the asset to the party who wants them, provided they can afford the monthly repayments. If the repayments were being shared or the party who was paying has taken up other debts after divorce and is unable to comfortably make payments, it is advisable that the secured asset is sold and the money used to settle the debt or part of it.

What happens if I meet my end of the bargain but my partner does not?

If your partner fails to make payments and they are not bankrupt, you can always go back to court to find a resolution. However, you should pay off the debt yourself in the meantime to avoid damage to your credit rating. Keep a record of all such repayments you make so that the court can factor them in when making a determination.

How do I protect myself from debt during a divorce?

Divorce is meant to give you a new beginning, but debt can weigh you down. To ensure your partner gets their fair share of the debt, try to be in civil terms with your spouse so that you can amicably agree on which debt each party takes. If you had a joint credit card, consider removing your spouse as the secondary cardholder or freeze the joint credit card account to prevent charges from accumulating, only making minimum payments. To reduce the amount of debt to a minimum, consider selling all the properties and using the money to pay off the debts. If one of the spouses will remain with the house, enlist the services of a mortgage broker in Toronto for advice on mortgage refinance.

Enlist the services of a lawyer, debt consolidation specialists in Toronto, and a mortgage broker for advice on how to deal with debt in a divorce. At Approved Mortgage Brokers, we appreciate that a mortgage is the biggest debt you will probably incur in your life and you, therefore, need the best rates and other terms. Other than helping clients apply for mortgages, we also assist them with mortgage refinance. We also do second mortgages, self-employed mortgages, new to Canada mortgages, construction mortgages, and even lines of credit, among other services. Call us on (416) 419-3939 for all your mortgage needs.