The idea of debt itself can be scary. Joined with divorce, it can be extremely daunting. Since financial hardships are a leading contributor to marital breakdown, it can often be difficult to get both parties on the same page. This is especially true when it comes to settling the several loans, credit cards and other debts accumulated during the marriage. Further complicating matters, common knowledge is fraught with misinformation about who is liable for repaying the debts, and who creditors can target in the event of a default.
Couples facing a separation are mostly torn apart by how the debts will be settled after the divorce.
Being married does not necessarily mean you are responsible for your partner’s debts. But it might. To better understand the rules regarding debt in a marriage and how to resolve it after a divorce, let’s review the two kinds of debt. The two debts we will be looking at is joint debt and individual debt.
What are the 2 kinds of debt in a relationship?
1. Joint Debt
Joint debt is when more than one party has co-signed for the debt – whether it’s a loan, line of credit, credit card or mortgage. It could also be a debt another person has guaranteed if one party’s credit was sufficiently poor to obtain it on their own. Each person whose signature is on the debt contract shares equal liability for the debt. In this case, both spouses. In the event of a default situation, the lender can take measures. This can range from collections to potential lawsuits against any or all parties to recover the money owed.
In some scenarios, both spouses can divide the debt equally by an informal or court mandated agreement. This may require an equal payment of a given debt by both parties. It could also mean parceling off responsibility for one joint debt to the first spouse, and another joint debt to the second. However, it is crucial to understand only the spouses are bound to the court order or informal agreement. For the lender, the debt is still co-owned. Therefore, they are within their rights to pursue the other party if one defaults.
2. Individual Debt
Individual Debt is when only one individual has applied and signed for the debt. The agreement is between a single individual and the lender. This may be a debt acquired before or after initiating the marriage. Individual debt can comprise of credit cards, income tax debt, vehicle loans or financing, personal loans, overdraft, lines of credit and more. As only one spouse signed for the debt, only that individual is legally responsible for paying it back. If they default, the lender cannot go after the other spouse for payment.
In many cases, the balance on the individual debt may lead to purchases made by either spouse. This also includes contribution to the purchase of shared assets, such as furniture. However, this has no effect on the ownership of the debt and does not impact who the creditor can pursue for repayment. The rules govern who owns the debt, not necessarily who has used or benefited from it. Considering this, some couples may also choose to enter separation agreements as above. This is when each spouse agrees to pay a portion of an individual debt or where each individual debt is parceled off to either spouse. As above, even if court mandated, the judgement affects only the couple and the lender would still pursue only the debt owner in the event of a default.
Debt, Divorce and Bankruptcy
The repercussions of debt after divorce go past deciding who is going to pay for what. The benefits of a dual income and expense sharing that take place in a marriage generally make it easier for both spouses to afford debt payments and other bills. Obviously, those costs are much more difficult for one person to manage on their own. Due to this reason, it is exceedingly common for one, or both, spouses to file for bankruptcy or consumer proposal shortly after separating. If only one spouse claims bankruptcy, it leaves the unfortunate burden of any joint debts on the other spouse. This can significantly increase the size of the other spouse’s debt and delays them from becoming debt free. At worst, it may drive the second spouse to also file for bankruptcy or consumer proposal.
Getting a divorce is often about making a fresh start, emotionally and financially. When you start off a new life, you should also take off on a new credit rebuilding journey. At Canada Auto Experts, we understand that life could be hard after a divorce and therefore, we help Canadians rebuild their credit with a car loan regardless of their credit. Call 1-855-550-5565 to speak with a credit specialist and get approved for an auto loan today!