The average length of a marriage in Canada is 14 years. Approximately 38% of Canadian marriages end in divorce. When a couple makes a decision to get divorced, the division of property is generally on their mind, but how debt is handled must also be given careful consideration.
In a 6-1 decision, the Supreme Court of Canada ruled in 2008 that a Vancouver woman was responsible for her ex-husband’s unascertainable tax liability for tax shelters he purchased during the marriage. The court’s ruling has an impact on all divorcing couples.
The Supreme Court set forth a precedent that couples who are divorcing sometimes share future assets and they must also share future debt that is tied to the marriage. To obtain a fair settlement, the complete financial situation of both spouses comes under review.
Obtaining Debt in the Name of Your Spouse
Every province in Canada permits a person to incur debt in the name of their spouse. The debt is to provide for the necessities of life. The law requires that the parties are living together at the time the debt is incurred.
The risk is that if a person is planning to file for divorce, they can create debt in the name of their spouse for the purpose of establishing their own new lifestyle. Those expenses might be putting a deposit on a new residence, securing utilities, and buying food.
Who is Responsible for Debt When You Get Divorced?
The Federal and Provincial governments of Canada do not require spouses to be held responsible for their spouse’s student loans or back taxes. If one party has outstanding student loans from a university education, then they would be responsible for that debt. If one of the parties owes Revenue Canada for back taxes, then that person is responsible for that debt.
Not all marital debt is that easily divided. If there are joint accounts the financial institution will consider both parties who signed the contract responsible for the debt.
An Equitable Division
Canadian law requires that parties to a divorce equally divide both the marital assets and the marital debt. The Family Law Act of Ontario accomplishes this based on the net worth of each spouse.
The court compares the assets and debts of each person at the time of marriage and again at the time of divorce. The result shows the increase of each parties’ individual net worth during the marriage.
Net worth is established by taking the value of property each spouse owned at the time of marriage, then subtracting their debt at the time of marriage. The result is the person’s net worth at the time of the wedding. A comparison is then made of each person’s net worth at the time of marriage.
At the time of divorce, each party is credited with any interest they have in property accumulated during the marriage. That person’s debt is then subtracted from their property interest. The difference is the spouse’s net worth.
The parties must equalize their net worth. As an example, if at the time of divorce the net worth of a husband is $400,000 and the net worth of the wife is $200,000, the husband will have to pay the wife $100,000 so that their net value is equalized.
Division of Debt
When dividing debt held jointly there is always a risk the other person will not make timely payments. Creditors will consider both parties equally responsible, even if the divorce judgment states otherwise. The credit bureau will be notified of late payments, negatively impacting the credit of the “innocent” spouse.
To protect your credit following divorce remove your name from any loans awarded to your spouse. For your name to be removed, your spouse needs to refinance the loan into their name. Depending on their credit, job history, and income they may or may not be able to accomplish this.
It is also important to remove your spouse’s name from any debt you hold. This removes any risk of them increasing the debt. If one person holds a credit card and the other is an authorized user, the handling of that debt is reported in both names.
Eliminating Marital Debt
Common debt that accumulates during a marriage includes credit card balances, mortgages, car loans, taxes, and money borrowed from family and friends. Each type of debt is addressed in a different manner.
The courts will not consider most claims of a loan from a family member or friend. In order to be given consideration, there has to be solid evidence that there is an actual loan. Without solid evidence, the court will consider the money a gift, not debt.
If there is a loan for an automobile the vehicle needs to be refinanced in the name of the person it is awarded to. If one person is responsible for the payment of a vehicle the other spouse is driving, there is a potential that the loan will be defaulted on.
If there is a home or cottage with a mortgage, the logical solution is to sell the property. The equity can then be used to pay off marital debt, with any remaining equity divided equally between the parties. The alternative is if one spouse is able to buy out the interest of the other and keep the home.
Debt Consolidation
A divorce has an impact on the financial situation of each person. Quite often the debt assigned to an individual spouse is burdensome.
Debt consolidation loans are frequently based on cash-out mortgage refinances. Cash-out refinances put the loan and assets of a mortgage in the name of the person who is in possession of the home. This allows that spouse to buy the equity of the spouse who is no longer residing in the home.
Debt consolidation is an alternative way of managing the debt a spouse is awarded in a divorce. The debt consolidation loan allows the person to roll all their debts together and make one payment instead of several. This will usually lower the overall monthly output required.
Get a Handle on Debt
Don’t let debt accumulated during a marriage cause a problem after you get divorced. With only a $12,000 monthly income, a stable job, and a Canadian bank account, any Canadian citizen can obtain a debt consolidation loan. It is simple to apply online or over the phone in less than five minutes. Contact Captain Cash now to learn how you can consolidate your debt and get access to quick cash.
