First, get the divorce if you need to. Marriage doesn’t always lead to a better life and a divorce does not equal personal failure.
If you decide to divorce, your financial life is going to change for the short-term. How big an impact depends on your debt level and personal family responsibilities. If you split households but still have to raise children, you share the costs related to your kids.
Child rearing aside, you are still responsible to repay your personal debts and any jointly-held debt. There are many types of debt to keep track of, and how responsibility for repayment is divided can ultimately be up to the courts.
This article is a primer to help you manage your debts when you divorce.
Types Of Debts To Consider During A Divorce
There are many types of debt to consider during a divorce. Some are easy to forget about, while some easily come to mind. Debts to consider during a divorce include are
- Balances on credit cards
- Other types of consumer debt (personal loans, lines of credit)
- Child support payments
- Car loans
- Student loans
- Arrears on personal accounts
Here is some good news. Depending on whose name is on an account or if you’re holding joint debt with your spouse, you may or may not be responsible for paying off these debts.
Who Is Responsible For The Debt In A Divorce?
Usually, whoever incurred the debt is responsible for paying it off. That means if you have a credit card and are the primary cardholder, you are responsible for paying it off.
If you have any joint debts, such as a mortgage, both you and your spouse are responsible for the full debt. If you both have several joint debts, you and your spouse can come to an agreement to assign the responsibility of paying off the joint debts to each other. Note that this agreement is not legally binding, and your creditors will still hold both of you responsible for paying off any joint debts.
Check out the pros and cons of a joint account.
How Is Credit Card Debt Affected During A Divorce In Canada?
The courts ultimately decide how credit card debt is split up if there are no arrangements made before your divorce. If the debt is in your name, your creditors will expect you to pay it off, even if your spouse spent the money.
You should get your lender to freeze any joint credit cards and to remove your spouse from cards where they are the secondary cardholder to prevent them from spending any more money and adding to your debt.
Furthermore, you must continue making the minimum payments on the debt until the legal system can sort out your debts. You could also pay off the debt in full or transfer the balance of the debt to a new account that only has your name on it.
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How Is Secured Debt Affected During A Divorce In Canada?
Secured debt is debt that has assets attached to it, such as an auto loan or a mortgage. Selling these assets, like a vehicle or house, and splitting the proceeds with your spouse is the best way to deal with secured debt during a divorce.
You could also buy out your spouse’s half of the debt or get the courts to sort out how your debt should be divided. If you’re dealing with an auto loan, talking to your lender about refinancing the vehicle under just your name or your spouse’s is the best way to go.
How Is Joint Debt Affected If Your Ex Files For Bankruptcy?
If your spouse files for bankruptcy and owes joint debt, you will be responsible for the full amount of the debt. Lenders and creditors will still want to be paid.
However, if you choose to ignore it, it can impact your credit score. Also, the lender can sell your debt to a collection agency which can further hurt your credit. The best way to seek advice and support regarding joint debt during a divorce is to seek legal advice.
Learn more about how divorce can affect bankruptcy.
Divorce, Debt, And Credit Scores
One of the unexpected consequences of divorce can be a battered credit rating. It can be tricky to determine which debts are yours to pay and which debts your spouse is responsible for. If you end up not paying debts that you’re responsible for, your credit score can take a hit.
Divorce itself does not impact your credit. How you manage your finances during and after the divorce will. That includes:
- Applying for new credit cards in a short amount of time. These show up as hard credit checks
- Failure to pay your bills on time
- A big increase in your credit utilization ratio
However, your divorce decree, which is the final judgement on the terms of your divorce from the courts, can dictate how your debts are split up.
Joint Accounts And Your Responsibility
Any joint accounts may be the responsibility of both yourself and your spouse, or the responsibility can shift to just one party.
If your name remains on any account, you may be responsible, and any missed payments can show up on your credit reports and affect your credit score.
Check out how your assets are divided in a divorce.
Child Support Payments
Missing child support payments can stay on your credit reports for up to eight years, which can negatively impact your credit score. Make sure to keep making child support payments during a divorce to prevent this problem from happening.
Credit Card Limits
Your income might go down when you divorce. The government of Canada states that this is especially true for women and single-parent households.
If a creditor reviews your credit card accounts, you may end up with a lower credit limit on your cards because they only look at your personal income.
How To Manage Debt During A Divorce
Remaining on good terms with your spouse during your divorce is obviously one of the best steps you can take if you have any amount of debt to deal with. In addition, you should consider the following steps.
- Be honest with your spouse and your divorce lawyer(s) about how much debt you have
- Freeze any joint credit card accounts so that only payments and not charges can be made to the card
- Make only the minimum payments until the legal system can work out how to split up and repay the debt
- Remove your spouse as a secondary cardholder on any credit card accounts so they cannot rack up any debt that you will be responsible for
- Consider selling your home and dividing the proceeds or buying out your spouse’s share of the home
- Refinance any vehicles you owe money on under one person’s name rather than under the name of both you and your spouse
Ultimately, speaking with your divorce lawyer about the debt you carry, whether it’s joint debt or individual debt is the most important thing you can do. Everyone’s financial situation is different and therefore there is no one size fits all when it comes to advice on dealing with debt.
How Do I Afford To Live While Settling Debts During and After A Divorce?
Life is expensive, but there are ways to save money or get basic necessities at a lower cost.
First, make sure you are eligible for- and enrolled in any government benefits. This includes federal benefits like the Canada Child Benefit (CCB) and provincial programs like the Ontario Trillium Benefit.
If you live in certain areas, you can qualify for the Carbon Tax/Climate Action Incentive Payment (CAIP) to offset the cost of heating. If you live in Quebec, there are tax credits you can get as a divorced person.
Canada is going through a housing crisis right now. However, you still have options. You can move in with a friend or a relative and agree to share all of or some of the expenses. If you have extra room, you can take in a foreign student or a boarder. In both cases, they pay you rent and/or a portion of living expenses.
Food is also very expensive right now. Your monthly food bill might not drop if you are taking care of your children and not sharing the food budget with your ex-spouse. Food banks, including those for Halal or Kosher diets, are there to help.
Professional Debt Help
If your debts are too much for you, there are professionals that can help. You can file for a consumer proposal or get consolidate your debt.
A consumer proposal is an alternative to bankruptcy. You need a Licensed Insolvency Trustee (LIT) to negotiate with your creditors. If the creditors agree to the consumer proposal, your total unsecured debt owing might go down. Other advantages include:
- Keeping your assets like your home or your car
- Interest stops accumulating on your debts
- Your payment remains the same and does not go up over time.
Another option is a debt consolidation loan. Instead of having many debts to pay, a debt consolidation loan rolls all of them into one loan. You might get a lower interest rate, but the real advantage is paying off all your debts with a lump sum and then paying your consolidation loan lender each month.
In the same vein, an accredited credit counsellor can arrange for a debt consolidation plan where you pay in installments. Credit counsellors look at your entire financial situation and help come up with a plan to get you out of debt.
The Bottom Line
During all of the upheaval, one of the things that can slip through the cracks when you’re going through a divorce is debt repayment. It can be tough to determine what debts you’re responsible for and which you’re not, but in general, whoever incurred the debt is responsible for paying it off.
If you and your spouse cannot come to an agreement on how to manage your debts, you can get the issue settled through the courts. The faster you get out of debt, the faster you can rebuild your financial health.