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Marital breakups are challenging. Spouses must make decisions about where each partner will live, and child custody arrangements if children are involved. Other significant issues are the division of assets and how to handle debt in a divorce.
It is essential to understand the types of assets and debts to consider during a divorce or separation: individual, excluded, or family assets, as well as individual, joint, or family debts. Knowing how they differ will help you navigate the division of assets and liabilities, enabling you to make informed decisions.
Understanding the Various Types of Assets and Debts
Assets are items of value. They can be things you acquired together or had before your marriage or common-law relationship. Assets include items like:
- A home.
- Vehicles
- Recreational or investment properties.
- Investments.
- Pensions.
- Businesses
- Insurance policies.
Individual property and excluded assets
Assets acquired before marriage or a common-law relationship are considered individual assets, allowing you to retain their value during a divorce. However, any increase in value since the partnership, such as a home, may be divided. For instance, if a house purchased for $300,000 before marriage increases to $500,000, the court may divide the $200,000 gain.
Family assets
Family assets are those that you and your spouse or partner acquired jointly. Typical examples are homes and investments. The court will divide the equity or value of the assets between you both.
Debt in a divorce
Divorce is tough, and debt can make it feel even heavier. Many couples have debts in addition to their assets. Dividing debt can be straightforward, but in many cases, it isn’t easy.
Common types of household debt couples carry are:
- Mortgages.
- Personal loans.
- Lines of credit.
- Credit card debt.
- Car loans.
- Tax debt.
A debt can be an individual debt or a joint debt.
Individual debt
An individual debt is solely in one person’s name, typically seen in situations like credit cards, vehicle loans, or lines of credit, even in marital or common-law relationships. An authorized user can have access to the account, but the primary account holder remains responsible for the debt.However, If you co-sign or act as a guarantor on a loan, you are also liable for repayment if the borrower defaults, even if the loan isn’t for your benefit.
Joint debt occurs when more than one borrower is responsible for repaying a loan or credit card. Each has signed the documents agreeing to repay the entire amount borrowed.
Family debt is debt that you and your spouse incurred while you were married or common-law.
Dividing debt in a divorce or separation
A divorce or separation impacts how you repay your debt, but it doesn’t change the fact that you owe the money. Your creditors don’t care who repays them, as long as someone does.
With joint debts, each party is liable to repay 100% of the debt. With an individual debt, only the borrower who opened the account must repay it. Tax debt is sometimes an exception to this. If the person who owes the taxes transferred assets to a spouse below fair market value for tax reasons, the spouse who received the assets may be responsible for repaying that portion of the tax debt. The Canada Revenue Agency can put a lien on your home for unpaid tax debt, even if the house is jointly owned.
When people separate or divorce, they can create a mutually beneficial agreement to clarify financial responsibilities.
Individual debt remains the responsibility of the individual account holder.
Joint debt can be taken over by one person agreeing to make the payments, or both contributing to it. Creditors are not concerned with who makes the payment or what your arrangements are. If they don’t receive the payment from one party, they will pursue the other.
Generally, you need to consider several things when dividing debt in divorce:
- Who will pay for which debts?
- Are repayments more affordable for one spouse than the other?
- Your course of action if your partner doesn’t make their payment.
- If assets securing the debt, such as a home, will be sold, or if one keeps it and takes over the payments.
Protecting your finances
One of the difficulties of a marital split is that you will be going from two incomes to one. If finances were an issue in your marriage, separating can make your financial situation worse. Some steps you can take to protect your finances are:
- Close any joint accounts.
- Cancel any supplementary credit cards.
- Reduce credit limits on products like joint lines of credit or credit cards.
- Consider selling secured assets like vehicles.
- Put an alert on your credit bureau so no one can open new credit in your name.
Dividing assets is crucial during a divorce. Spouses must agree on managing debts like car loans or mortgages. Options include selling, paying off, or having one spouse take over the debt completely.
If one keeps the house or car, they must compensate the other for equity and refinance the loan in their name. If an agreement can’t be reached, the court will divide the assets and debts, considering each spouse’s income and debt repayment ability.
What happens if you can’t afford your payments?
A marital split can damage your finances. Keeping up with all your payments might be impossible on one income. Not only will this damage your credit score, but the financial stress can also affect your mental health.
What can you do if you can’t repay what you owe? One solution is to contact a Licensed Insolvency Trustee (LIT). They are debt experts licensed by the federal government. LITs offer legally binding debt relief options which can reduce or eliminate your debt and stop your creditors from harassing you. Two solutions they can offer are Consumer Proposals and Bankruptcy.
A Consumer Proposal can reduce the amount you owe by up to 80%. It will also stop the interest and fees on your debt. You’ll make one monthly payment to your LIT, who distributes the funds to your creditors. A Consumer Proposal gives you up to five years to repay your debt, and you can keep all of your assets.
Filing for Bankruptcy is reserved for more extreme financial difficulties. It will eliminate your debt and stop your creditors from contacting you, however, you may lose certain assets. Each province allows you to keep some of your assets, but if you have more assets than the province allows, your trustee may sell your assets to repay your creditors.
A first Bankruptcy takes nine months to complete. Once your Bankruptcy is discharged, your unsecured debts will be gone and you start to rebuild your credit.
Both Consumer Proposals and Bankruptcy deal with unsecured debt and don’t include mortgages or car loans secured by a vehicle unless you transfer the asset to your LIT.
Also – Debts like alimony and child support are also excluded in these debt options.
Where to Find Help With Debt
Going through a separation or divorce is emotionally and financially difficult, but you don’t have to face it alone. If your debts are overwhelming, we can help. Our team of Licensed Insolvency Trustees have been assisting people to deal with debt from divorce for more than 40 years. Contact us online or call us at 1-888-371-8900 for a free consultation. We’ll work with you to put your debt behind you and help you get a fresh start.
