It is not unusual for a couple to accumulate significant debts together that must be dealt with as part of their financial arrangements in a divorce or separation. There are, however, several things that you should be aware of before proceeding.
In particular, it is important to know that a divorce or separation agreement will not eliminate your obligation to repay a debt you signed for. In other words, you cannot transfer liability for your debts or joint debts to one spouse by virtue of a divorce agreement alone.
Having said that, one spouse is not automatically liable for the debts of the other. You can only be held responsible for repayment if you have signed, co-signed, or guaranteed a debt yourself.
The best approach is to pay off any debt before filing for divorce, but this is not always possible. You may instead find that you have to divide the debt, and monthly payments, as part of the separation process.
If you wish to ensure that your debts are handled properly as part of your divorce or separation, follow these tips.
1. Obtain a copy of both spouses’ credit reports at the beginning of the process to ensure that you have a complete picture of debts that are owed both individually and jointly. This will help eliminate surprises down the road.
2. Talk to your lender. Your financial institution must agree, in writing, to remove any party from the obligation to pay under any loan agreement. This includes any debts guaranteed as well as loans you have taken out jointly.
3. Better yet, transfer all debts into new accounts under the name of the individual who will become liable under the divorce or separation arrangement. This may require refinancing in the event of major debts like a home mortgage or car loan. Failing to cancel joint debts can impact your credit report negatively in the event that your ex-spouse continues to utilize the account or does not make agreed upon payments.
4. Cancel all joint and supplementary credit cards and open new ones individually to ensure neither spouse can continue to incur more debts or will become responsible for the spending of the other.
5. If you have used any form of online banking, change all access and authorization numbers. Remove accounts as necessary to ensure each spouse only has access to those accounts they are now responsible for. Cancel any joint pin numbers if applicable.
6. If one spouse chooses to file for bankruptcy in order to deal with marital and other debts, it is possible to file a joint-bankruptcy or joint consumer proposal even if you are divorced. In the event of significant joint debts, talk to a bankruptcy trustee about your options.
As a final note, check your credit report every few months after your divorce or separation to ensure that all debts have been transferred properly and that your records have been updated. It is important that you manage not only the debt itself, but monitor your own credit history as you will likely be applying for new debt, individually, in the future.
Ted Michalos is a Chartered Professional Accountant (CPA) and a Licensed Bankruptcy Trustee. As a co-founder & President of Hoyes, Michalos & Associates, he speaks regularly at local commerce and professional events about insolvency issues and has testified before the Canadian Senate on issues of bankruptcy legislation. His expertise focuses primarily on helping individuals solve their financial problems.