Does your spouse or common-law partner have credit card debt, student loan debt, tax debts, lines of credit, car loans, or personal loans? If so, you might be worried that you'll be responsible for their debt repayment if you separate or divorce. Unfortunately, the answer of whether you'll be responsible or not is complicated. We walk you through what you need to know.
Your liability for your partner's debt
From the creditor's point of view, you're only responsible for any joint debts you hold with your spouse where both of you are named as borrowers on the account. If you co-signed a credit account for your partner and they fail to make payments in the future, you could also be responsible for that debt, and their inability to make payments could affect your credit rating unless you take over the payments temporarily or indefinitely. However, a lender cannot take you to court or force you to pay debt held entirely in your spouse's name.
That makes the issue of whether or not you're responsible for your spouse's debt seem clear — but the court could rule that you have a responsibility for repaying a spouse's debt. Family law courts in Canada can treat debt acquired during marriage as joint debt that should be shared equally upon divorce — unless you made a previous legal agreement to divide your debt differently.
So, if your spouse came into the marriage with debt, you won't be held responsible for that debt. But you could be responsible for credit card debt or student loan debt they acquired while you were together.
That said, sometimes the courts will divide debt unequally but only if mitigating circumstances are involved. Judges consider things like the ability of each spouse to pay a share of the family debt, how the debt was incurred, and whether one spouse greatly increased or decreased the marital debt after a separation.
Handling joint debt during separation
If you're planning to separate from your spouse or common-law partner, you should sit down with them to discuss your personal and joint debts and accounts and create a debt management strategy to follow during your separation.
During a partnership or marriage, you might have co-signed for auto loans, mortgages, joint credit cards, and lines of credit. You might not even remember all of the accounts that are in both of your names. A best practice is to get a copy your credit report and check to make sure you haven't forgotten a joint department store credit card you never use. You'll also want to look at how much debt you both had when you were married or became common-law partners to determine how much is marital debt.
If a joint account is debt-free, you should be able to easily close the account so long as you both agree to it. However, if there's debt on the account, you'll need to either repay or refinance it. Go through your joint debt and decide who will be responsible for repaying it during the separation or after the divorce, then transfer or refinance the debt to personal credit accounts and close the joint accounts.
Some of that division could be easy, like if you each co-signed on each other's cars. You can both get new auto loans in your own names for your own vehicles. However, it could get more complicated if you share a mortgage or joint credit cards, especially if you're unsure who will keep your home or if one of you has a greater capacity to repay the debt or is more likely to qualify for refinancing the loan than the other. It's important to note that divisions of debt you make before your divorce is finalized are not necessarily binding. A judge could decide to change the way your debt is distributed if you end up litigating your divorce.
If you can't agree on who will take on responsibility for the debt settlement and don't want to close the joint account for that reason, you should make it clear who's responsible for paying that credit account until the time your divorce is settled and set up a system to make sure you're both able to check that the other is making consistent payments. If you still have a joint bank account and feel comfortable keeping it open, you can use that account to repay joint debt until you decide how to divide it. That will allow you both to protect your credit scores against missed payments.
If your spouse doesn't follow your agreement around credit payments during your separation and you have to temporarily take them over, be sure to keep track of any payments you make on your joint debt while you're separated as that could impact your settlement.
If you have joint revolving credit accounts like credit cards and lines of credit that you would like to keep open until your divorce is finalized, you can freeze the accounts so no new charges can be made.
Keeping a joint account open
There are some cases where you might decide to keep a joint credit account open during your separation and even after your divorce. For example, if you have children and you want to easily split certain expenses. Whether you want to do this will be depending on your particular situation and how you are navigating your situation with your former partner. There is the risk of your former spouse potentially adding up charges outside the scope of your agreement. Consider reducing the credit limit and transaction limit on this joint account and checking it frequently.
Handling personal debts during separation
When it comes to personal debts, many couples decide to pay their personal credit accounts during separation. During separation, you're not legally responsible for your spouse's debts. Creditors cannot come to you to ask for repayment, and if they don't pay their personal credit accounts, it will not affect your credit score.
However, if one partner made significantly more and was responsible for helping with debt repayment, you might decide to continue to help them pay that debt during separation. As debt is divided during a divorce, if their debt balloons during your separation because they aren't paying it, that could end up becoming partly your responsibility to repay. This will also help your ex be in a better place financially while they await the division of your marital assets to ensure their credit score won't be impacted.
If your spouse is an authorized user on your personal credit card, you'll want to cancel their ability to use your account.
Your credit rating
The bad news is that your divorce will likely affect your credit rating. Closing credit accounts can reduce your credit score, as can opening a lot of new credit accounts or making new credit inquiries to refinance your debt.
If you're concerned about optimizing your credit score so you can refinance at the best rates, you might choose to transfer lines of credit or credit cards onto existing cards rather than opening new ones. You might also decide to apply to refinance a big asset like a mortgage before applying to refinance your car loan to optimize your rate on the larger loan. Not sure how best to navigate refinancing your debt? Consider reaching out to a Scotia advisor for help.