3 Ways To Prevent Problems Caused When Divorcing Couples Have Joint Debts

Ontario law says that when both spouses sign for a joint debt, such as a joint line of credit or credit card, both spouses are legally responsible for the full amount owed - even after the divorce. This means the bank can sue either spouse for the debt, even if one spouse agreed to pay the entire amount. 

As a result, one spouse's late or missed payments can ruin the other spouse's credit rating, making it hard or even impossible for the innocent spouse to borrow money, lease a car or rent a home.

3 ways divorcing couples can avoid liability for joint obligations

1. Retire all joint debts at separation

At the point in time when you separate, pay off and retire all joint debts. Even if you are on good terms and trust each other completely, still pay off your joint debts. 

This is wise even from a financial planning standpoint. Neither one of you can know what financial problems the other might face in the future. So, to play it safe, divorcing couples should pay off all joint debts.

2. Refinance joint debts.

Convert joint debt into individual debts. Figure out what each person’s proportionate share is and then have each person assume that debt in his or her own name. It prevents the joint debt level from rising after separation. 

For example, a line of credit or credit card can still be used to increase the couple’s debt level after separation. This is particularly common when divorcing couples require funds to move out or hire a lawyer.  Ending joint debt and ascribing each spouse’s proportionate share to new debt in his or her own name also simplifies the divorce process later.

3. Equalise debts under a legally binding separation agreement

In some cases, couples cannot pay off all joint debts or refinance them. This is often true for young couples, who may have more debts than assets. In this case, it is important to have your divorce lawyer equalize the debts and then draft a Separation Agreement that will protect each party as much as the law allows.

Even so, the best Separation Agreement won't always protect a spouse. That's why paying off or refinancing joint debts are a divorcing couple's best options.

If you need legal, strategic or financial advice on your divorce or a second opinion, email Steve@Benmor.com. Expertise, leadership and excellence you can count on.

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