By Jasmin Brown, BDO Debt Solutions

Common Questions about Debt and Divorce

Sep 18, 2023 | 9:09 AM

One of the leading causes of financial difficulty is relationship or marital breakdown.

It can also be said that financial issues are a leading cause of relationship or marital breakdown. Things can get messy if the marriage does not end amicably.

Although it would be ideal for matters relating to the debt to be settled prior to divorce, that is not always an option.

Many people have questions about what happens to debt when it comes to separation or divorce, which are discussed below.

Am I responsible for all debts, even if I am not a joint-borrower or a co-signer?

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Generally speaking, you are only responsible for debts that you actually sign for. However, it could be that the terms of a divorce or separation agreement indicate who is responsible for the repayment of each debt. If payments are being made in accordance with the agreement, there is typically no issue. However, a lender does not have to follow a family law order. If payments are not being made, a lender will pursue the person whose name is on the account only.

What if the debt is under one spouse’s name, but the other spouse spent the funds?

Who spent the funds will not matter to the lender. Their goal will be to collect payment on the debt. They are limited to pursuing the person named on the account as well as any co-signers or joint borrowers. If the spouse that spent the funds did not co-sign the loan or is not a joint borrower, the creditor will not pursue them, but will attempt to collect payment from the person actually named on the account.

What if an ex stops making payments on the joint debt?

A lender will not simply cut the debt in half, and collect 50% from one person and 50% from the other. Joint borrowers and co-signers are “jointly and severally liable” for debts. Essentially, each person named on the account can expect to be responsible for 100% of the debt and to have to make payments until such time as the debt is repaid in full. It may not be equitable, in the sense that each borrower pays for their half. The lender will collect from whomever they are successful in collecting payment.

What if the divorce agreement says that individual debts would be shared in a divorce?

There is really no issue as long as both parties are complying with the order and making payments in accordance with the agreement. Where issues can arise is when one party does not comply with the order. In that case, creditors may begin collection efforts. If your name is on the debt and your ex is not making the payments as per the family law order, it can affect your credit. You would be wise to continue making payments on your own, if possible, until the matter can be resolved. If your name is on the debt, then your credit score can be impacted.

How can a person protect themselves from debt during a divorce?

If you have concerns about protecting yourself prior to coming to an agreement with your ex or throughout your divorce proceedings, there are some things that you can do. You can have your spouse removed as secondary cardholder on any of your credit cards or accounts to prevent them from incurring additional debt in your name. You may also want to freeze certain accounts in order that payments may be accepted to pay down the balance, but no further charges can be made. Keep up with at least the minimum payments until an agreement can be reached. You may also want to look at refinancing secured loans (like houses or vehicles) into one person’s name only.

Navigating debt in the midst of a separation or divorce can be quite tricky. We would always recommend that you seek the advice of a lawyer to assist you with the process. If you are finding that your debt is overwhelming and you are unsure of what to do, know that there is help available. Reach out to a Licensed Insolvency Trustee to learn your options. There is no obligation and the consultation is free. It will equip you with information needed to help you to make sound decisions as you go through a difficult time.

If you are having trouble making ends meet each month, finding the right debt solution can help. Visit the BDO Debt Solutions website for more information about bankruptcy, or call 1 855 BDO DEBT to book a free, no obligation consultation.

Jasmin Brown is a Senior Vice President overseeing the insolvency practice in Saskatchewan. She is committed to providing creative and practical debt solutions with empathy, understanding and professionalism to help people overcome their financial difficulties.