When Common-Law Means Common Debt: Dealing With Debt In A Common-Law Relationship
2 May 2018
Common-law relationships are on the rise in Canada. According to Statistics Canada’s most recent census, more than a fifth of Canadians were living in a common-law situation in 2016 – up from just 6.3 per cent in 1981.
While the government may look at common-law situations differently than marriages, money and debt are major contributors to stress in any relationship no matter the marital status.
WHAT’S A COMMON-LAW RELATIONSHIP?
The definition of a common-law relationship varies from province to province. In Alberta, my home province, common law couples are legally referred to as “adult interdependent partners” under the Adult Interdependent Relationships Act. You’re considered to be in a common law relationship after living together for three years or sooner if you have a child together.
It’s important to know that the federal government has a different interpretation of what’s considered common-law status. The Income Tax Act considers you to be in a common law relationship if you’ve lived together for 12 consecutive months. You must file your income tax return based on this rule to ensure that you’re filing accurately and don’t create any issues with Canada Revenue Agency.
WHEN DOES COMMON-LAW MEAN COMMON DEBT?
Someone typically becomes responsible for their common-law partner’s debt when they have agreed to be one of the following:
- A Co-Borrower or Joint Applicant: The most typical type of co-borrowing is applying for a mortgage together. In this case, you and your partner are held equally responsible for repaying the mortgage to the bank or lender.
- A Co-Signor: Consider yourself the “backup” for the bank or lender if your spouse or partner, as the primary applicant, defaults on payments or is unable to pay what is owed. Having a co-signor is security for the bank or lender and is generally used when the primary applicant has a poor credit score or rating.
- A Supplementary Card Holder: Your spouse or partner may request the credit card company issue an additional or supplementary card to you so that you can be an “authorized user” on the account. Although this offers convenience for the couple, the downside is that both might be jointly responsible for the balance owing on the credit card. It’s important to read the fine print before using the card as a supplementary authorized user.
INSOLVENCY IN A COMMON LAW RELATIONSHIP
When we looked at our data over the last four years, approximately 10% of consumers across Canada who filed with Grant Thornton Limited were common-law couples. Although married couples represented the highest percentage of consumer proposals and bankruptcies filed with us, people in common-law relationships expressed the same fears and concerns as most married couples do.
During our free consultations, consumers in common-law relationships generally ask these questions regarding how their debt may affect their partner:
- If I file a consumer proposal or bankruptcy, will my creditors go after my partner? If you brought debt into the relationship, a common-law relationship does not automatically create joint responsibility for the debt. If the both of you apply for new debt together, like a joint loan with the bank as co-applicants or if one partner co-signs for the other, then both partners are equally responsible for the repayment of the debt.
- Does my low credit rating or score automatically affect my partner? Firstly, the two main credit bureaus in Canada, Equifax and TransUnion, maintain credit reports for each person separately. Credit ratings measure your behaviour with credit (e.g., late payments) from an R1 rating, which is excellent, down to an R9 rating, which results when a bankruptcy is filed. When a couple acquires joint debt, their individual credit ratings are affected based on whether they make their payments on time and repay the debt according to the terms of the agreement.
If one partner has an excellent credit score of 750 while the other partner has a poor credit score of 500, it will be more difficult for the couple to qualify for a joint loan since the lender will view the credit scores collectively. Credit scores represent how much of a risk you are to a lender based on payment history, length of credit history, etc. – the higher your score, the less of a risk you are.
If your partner resolves their debt through a Consumer Proposal or Bankruptcy filing, it’s a journey that the both of you will no doubt face together in terms of support—however, aside from that, your involvement stops there. You won’t face the responsibility for your partner’s debt or the negative impact on your credit report as long as you’re not a co-borrower, co-signer/guarantor or supplementary credit card holder. Your spouse may be required to report his or her income to the Trustee; however, it is your right to not disclose your income.
If you’re having issues with debt and are in a common-law relationship, it’s important to be open about your finances with your partner. Debt carries an emotional weight on any relationship. It’s important to talk to your partner about your current financial challenges, so you’re both on the same page when it comes to your financial goals as a couple.
If your financial situation has reached a point where you cannot continue to pay your debt, talk to a Licensed Insolvency Trustee. We understand that debt happens, and during a free one-hour consultation we will assess your financial situation and discuss the options that will work best for you.