Divorce and debt is a complicated topic. Navigating a divorce is a stressful situation in a person’s life. The end of a relationship can be emotional. Adding the financial burden of debt during a divorce makes it even more challenging.
Dividing up debt in an amicable divorce is complex enough, but debt can be challenging to negotiate if you and your spouse are not on good terms.
Divorce can be a financially difficult situation. It can be challenging to manage a household on one income compared to two while also maintaining your expected standard of living or providing for your children. Many of our clients who are recently divorced struggle with their financial obligations. If you are considering debt relief solutions because your debt has become unmanageable due to divorce, we can help you explore your options to get out of debt. For many, debt consolidation or a consumer proposal can help start a new chapter in life on the right financial foot.
Every divorce and everyone’s debt situation is different. Our team of Experts can help you explore options that are best for your personal situation.
What happens to debt in divorce?
Generally, under the Family Law Act, you will only be assigned the debts in your name. Each person is individually responsible for the debts in their name only. If you and your spouse share debt, you will generally be responsible for the debt together.
However, dividing up assets and liabilities for a household can quickly become complex, especially if both spouses had different salaries, had debts or assets before their marriage, or had different spending habits. Ultimately the courts can decide what happens to debt in divorce.
When you and your spouse sign on to debt, you both jointly owe the debt. Your divorce agreement might dictate that you are responsible for some debts and your spouse for others. However, a creditor can still come after you for debt that your spouse may have agreed to pay for in the divorce agreement. Joint debt can become complex quickly, for example, if one spouse defaults or files for bankruptcy. The other spouse might continue to be responsible for the debt, and their credit score will be affected.
Generally, each spouse is responsible for the debt in their name. If you have credit card debt, lines of credit, or other debt you signed for on your own, you will be responsible for paying that off yourself. However, depending on the couple’s situation, in some instances, the court might rule differently, for example, if one partner was a stay-at-home parent and had loans to repay. It is best to consult your divorce lawyer for advice in such cases.
Mortgages and Divorce
The home you and your partner shared, your matrimonial home, is treated as a special asset than other types of property you might own. If the home you shared as a couple has a mortgage, it is important to keep this in mind, as the law will influence how to treat the mortgage on your matrimonial home. In Ontario, the home you shared when you were together, belongs to both spouses, regardless of whose name is on the title.
Dealing with a mortgage on a matrimonial home can get complicated. There are generally three ways to deal with it: sell the house, one party sells it to the other, or both spouses continue to share the responsibility for the mortgage.
Sell the house
For many, this is financially the simplest solution. The money from the sale will settle the mortgage debt. Neither spouse will have to worry about the debt this way. However, moving after a divorce for both spouses, and children, if any, can be stressful.
One party sells to the other.
If one spouse can buy out the other, they can own the home and be responsible for the debt. The lender will probably do additional due diligence to ensure that the spouse who assumed the mortgage can afford to make the payments independently.
Both spouses continue to own the house.
If the couple wants to hold onto the house but neither can afford to buy the other out, this can be a viable option. However, it can get messy, as both spouses need to trust that the other will make payments on time, in full.
Other Secured debt
If the couple has other secured debt, such as a car loan, or a mortgage on additional properties, it is treated differently than unsecured debt, such as credit cards or a line of credit. In many cases, the couple might decide to sell the asset to settle the debt and be financially free from the obligation. Other couples might consider one spouse buying it from the other. If the couple cannot decide, the courts will rule on this. It is ideal to speak to the lawyer handling your divorce to see what options you can consider.
Divorce and Debt
Divorce and debt are complex issues. Divorces can be emotional and stressful. Adding the financial burden of debt to the mix makes it more challenging. If you have been recently divorced or are considering divorce and have debt, it is essential to seek professional advice to navigate your debt.
Every divorce and everyone’s debt situation is different. Our team of Credit Counsellors can help you explore options that are best for your situation.
Call us for a free consultation if you are now struggling with debt.