Whether you've been together for two years or 20, your finances are likely deeply connected with your soon-to-be ex's. If you're drawing up a separation agreement or starting divorce proceedings, you need to consider how things like shared credit cards, joint bank accounts, co-signed lines of credit, and co-owned assets will be divided amongst the two of you. Here is what you need to know about how family law usually divides assets, debts, and other finances during a divorce.
Many couples begin to separate their finances during trial separations or legal separations and continue to have conversations and work through the process of separating their finances up until a divorce agreement dividing marital property is reached, either in the courts or through mediation.
The first step in separating your finances is knowing everything you own individually or co-own. Make a list of all your financial accounts, including chequing accounts, savings accounts, credit cards, auto loans, personal loans, lines of credit, tax liabilities, life insurance policies, CPP or QPP credits, pensions, TFSAs, RESPS, investments, RRSPs, homes, and property. Make sure to note whether each is a joint or personal account and the balance on each account.
While many expect property division to be 50/50, that's not always the case. A few factors come into play when it comes to how finances are divided. The first is how much you brought into the marriage.
Your spouse typically doesn't have a right to a portion of any assets you already owned prior to marriage unless you listed them as joint owner on those assets during your marriage. Your spouse also typically doesn't have a right to assets or money you inherited or received as a gift, life insurance proceeds, legal awards, or separate property you excluded in a prenuptial agreement or other legal agreement prior to or during your marriage. Finally, if you racked up considerable debt, made unauthorized withdrawals, or earned considerable money after you separated, the family court might treat those funds differently.
Typically, finances get divided by adding up the value of each spouse's assets and liabilities post-marriage to determine their current share of the net family property. The spouse with the higher net family property amount could then potentially need to pay the other spouse an equalization payment to ensure they equally share in the liabilities and assets that resulted from the marriage.
For example, if one spouse came into the marriage with $100,000 and didn't increase or decrease their savings, and the other came into the marriage with no money or debts, but had a net family property after of $500,000 at the dissolution of the marriage, the second spouse could owe the first $250,000 as an equalization payment.
That said, a family court can deviate from that formula, especially when it comes to family debt. For example, if upon the end of the marriage the couple owes more money than they have in assets, the judge might decide to allocate more of the marital debt to one spouse if they have a much higher income.
If you have joint bank accounts, you'll likely want to close them and transfer the divided money into separate accounts once you've agreed on the division of money either via a court order or a separation or divorce agreement. If you have not agreed and are worried that your spouse might transfer or withdraw money, you can freeze the accounts or get an order to prevent the withdrawal of money over and above joint expenses.
If your spouse has already withdrawn money from a joint account, document what was taken out and when as that can be included in the divorce settlement. If you're temporarily keeping the account open, make sure to keep track of it closely until the funds are divided and it's closed.
If you have a joint credit card as a couple, you might want to consider freezing the account until you know who will be responsible for repaying that debt, then close the account once the debt is transferred or refinanced.
If your spouse or partner is an authorized user on your credit card, you'll want to remove them from your card. If you have joint loans like auto loans, personal loans, lines of credit, or mortgages, you'll want to refinance those loans under one of your names once you decide who'll take care of the debt.
If you ever co-signed a loan for your spouse, you can ask the lender if you can be taken off as co-signer or request in the divorce agreement that they refinance that debt so you're no longer legally responsible if they don't repay it. Doing so will protect you from future legal liabilities and hits to your credit score if your spouse defaults on the loan.
You likely qualified for your mortgage on the basis of your combined incomes, so first and foremost, see if either of you would be able to keep your family home. If neither of you want to or you can’t qualify for a new mortgage on your own, then you'll need to sell your home. You might also need to sell your home if one of you wants to stay but cannot afford to pay the other out for the equity you've accumulated together.
Many permanent life insurance policies have cash value, so make sure to include them in your asset division. The policyholder can often take out a loan against the cash value to pay out the other spouse to avoid having to surrender the policy.
You'll also want to divide the value of any retirement savings and registered accounts like RRSPs, pensions, RRIFs and CPP. One way to do this is to compensate your spouse with other funds for their share of the value of those accounts. However, during a divorce, you can also divide CPP credits, transfer RRSPs and RRIFs tax-free, and divide your pension.
Once you're done dividing accounts, make sure to update your beneficiaries if your former partner is still listed.
Once you've divided your assets, money, accounts, and debts, you'll want the support of a financial professional like a Scotia advisor to help you figure out how best to manage your portion of your marital assets and liabilities, craft a new budget, and fulfill your support obligations. A Scotia advisor can help you create a plan to meet your financial goals even after divorce.