What happens to debt in a divorce?

Money issues, including financial stress and mismanagement, are the leading cause of divorce in Canada. And, while going through a divorce is already emotionally taxing, untangling the web of 'who owes what?' can lead to even more stress and confusion.

Dividing up debt during a divorce can be a complex process in Canada. Understanding how a divorce impacts debt is important, whether it's a mortgage, car loan, or credit card debt. That's why we created this guide—to clearly outline what happens to individual and joint debt; how to protect your finances during a divorce; and how to deal with unmanageable debt after a divorce.

Who’s responsible for debt in a divorce?

If you're wondering whether you're responsible for your spouse's debt, the short answer is maybe. Having to pay for debt after separating depends on whether it’s individual, joint, or co-signed.

In a divorce, the division of debt typically depends on whose name is attached to it and the laws of your specific province. Most often, individual debt (debt that’s in your name only) is your responsibility, while joint debt (debt obtained with your spouse) has shared responsibilities. Let’s explore the difference between individual and joint debt.

Individual debt

Individual debt is borrowed by one person, like a personal credit card or student loan. This kind of debt usually stays the responsibility of the person who applied for it and whose name is on the agreement with the lender. While this might seem straightforward, it's a critical point to remember. As the sole signer, only that individual is legally responsible for repayment. This means that the lender cannot contact their spouse or partner for payment, as their name isn’t on the agreement.

In many situations, both of you could have contributed to the individual debt or used it to buy shared items like furniture or groceries. No matter if you both used or benefited from the purchase, if it was made using individual debt, it doesn't change who’s responsible or who the lender can pursue for payment.

Joint and co-signed debt

Joint debt is any debt that you and your spouse applied for and received together. This could be a line of credit, joint credit card, mortgage, or car loan. Since both your names are on the agreement, you can both use the debt, and therefore are equally responsible for paying it. In this case, the lender can contact both of you for repayment.

If you or your spouse has co-signed a loan for the other, the borrower is primarily responsible for the loan, but if they miss payments, the co-signer can be held responsible instead. This type of debt is common if one spouse has a low credit score or little credit history, as adding a co-signer to their loan application can increase their chance of being approved. If your spouse doesn't pay their share, creditors can demand you cover the total amount.

Separating couples often agree to an informal or court-mandated agreement to divide joint debt equally between spouses. Depending on the agreement, this could mean splitting the total debt amount or dividing joint accounts, so each person manages a separate share. Although you and your spouse might agree to this, your lenders aren’t formally involved which allows them to contact you if your partner fails to make payments.

Laws can vary by province, and individual circumstances can significantly affect the handling of joint debt in a divorce. For advice specific to your situation, contact a legal professional in your province for support.

Protecting your finances during a divorce

It's important to safeguard your financial health during a divorce. Here are some ways to do so:

• Avoid additional shared debt. Close or avoid using any active joint accounts. It’s a step towards separating your financial lives and ensuring you don't obtain further debt on those accounts.
• Regularly check your credit report. Annually checking your credit report can help you spot problems early and take proactive steps to protect your credit health.
• Maintain open communication with lenders. If you're upfront about your situation, lenders may be able to work with you on a payment plan or other arrangements.
• Seek professional financial advice. Finding a qualified and trustworthy professional to help you navigate your finances during a divorce is critical.

Life after divorce

Financial challenges are major cause of marital breakdowns. A divorce won’t necessarily make those challenges disappear, and many Canadians find themselves in a tough financial spot after a divorce. This is generally due to:

• Adjusting to living on one income. When married, dual incomes and shared expenses usually make handling bills and debt more manageable. When one person has to cover these costs alone, it can become much more challenging – especially when starting fresh. Moving costs, caring for children, paying spousal support, or replacing assets like furniture or a car can be costly on a single income. These added expenses can lead newly single Canadians to rely on debt to make ends meet.
• Legal fees. On top of an increase in monthly expenses, you may have legal fees to cover. On average, legal costs in Canada can range from $2,000 for an uncontested divorce to $25,000 for a contested divorce. Additionally, you may take on additional debt if you decide to buy out assets or equity from your spouse. This is common for cars, homes, and retirement investments.
• Lingering joint debt. Most people can't repay what they owe in full during a divorce, leading to lingering joint debt. Although you may agree on who will pay what, your lender still sees you as equally responsible. If your ex-spouse misses or make late payments, it could hurt your credit score and even result in lenders pursuing you for payment.

Dealing with unmanageable debt

Divorce brings about new challenges, both emotionally and financially. If you're struggling to manage your debt during or after a divorce or relationship breakdown, there are ways to get help. We suggest speaking with a Licensed Insolvency Trustee to learn about your options. At Grant Thornton, we offer judgment-free, consultations to help you find the best path to debt freedom. Call today at 1-844-4GT-DEBT or book online for a brighter financial future!

Everyone's situation is different, and this guide is a general overview. For advice that fits your situation, ensure you contact a legal professional in your province to gain support.