If splitting up isn’t enough to make your head spin, divorce debt can serve as a lasting negative experience long after you sign the paperwork.
Once you sort out child custody and split up assets according to your divorce decree, you likely have little energy for anything else. Filing for divorce and agreeing on how you wish to split the divorce debt responsibilities can be one of the most stressful issues for couples to handle.
That’s a lot of stress, considering 1.9M Canadians were divorced as of July 2019.
“If you or your spouse had a lot of debt during your marriage, you may be concerned about your responsibilities for paying that debt back, and the implications on your credit and financial future,” says Jeff Schwartz, Executive Director, Consolidated Credit Canada.
With finances being a significant factor in relationships, couples seeking to keep divorce debt to a minimum can learn how credit card debt is handled in a divorce below.
Which debts can a divorce affect?
Here are the most common types of debt that divorced couples have to deal with:
- Credit card debt
- Car loan
- Medical expenses
- Outstanding accounts (rent, electricity, cable, etc.)
Who pays which divorce debts?
Remember, creditors are interested in recovering the debt that you owe, and they care little about who pays it. When you terminate your marriage, the divorce agreement states that one or both of you must pay the debt, but it depends on the type of debt it is.
Joint Debt
If you have a joint credit card with both your names on it, you may both have to contribute. Other forms of joint debts include:
- Line of credit
- Various loans
- Home loan
- Collection accounts
When you take on debt together during the marriage, lenders see it as debt you both own. Some separated couples decide to split the debt based on who spent what. This is possible, but again, you must get approval in writing from your creditors if it is joint debt. Check your loan agreement first, because technically, you are both responsible for the repayment after a divorce.
Individual Debt
In general, you aren’t legally responsible for your spouse’s debt if he or she had a card in his or her name only.
The same goes for spouses when they separate. If you had debt on a credit card or account with your name on it, you may be solely responsible for the payments. Other individual debts to consider are:
- Income tax debt
- Overdraft fees
- Vehicle loans
However, divorce debt also depends on the stipulations of your divorce decree and if you have a prenuptial agreement.
Close joint accounts
Try to pay off credit card debt before the divorce is final, to protect your credit score and plan your finances moving forward. Close joint credit and bank accounts upon formal separation, and enclose a repayment plan as part of your divorce settlement.
The creditors may agree to split the debt among new single cards or may require that you pay the balance off, depending on the circumstances. Make sure that you make any such requests in writing to your creditors.
Beyond that, establish credit and bank accounts in your own name.
“If you’ve not had a card in your own name before, or if you have a lower income, it may be hard for you to establish your own credit. Similarly, if you still have joint debt outstanding with your spouse, creditors may be less willing to lend you more money, especially if you don’t have a lengthy credit card history to draw on,” says Schwartz.
To establish your own credit, you can open up a low-limit credit card, secured with cash or other assets. Make a point of using this card strategically for purchases that you intend to pay off every month. Some include:
- Fuel
- Utilities
- Phone
- Groceries
Ensure you have enough money to account for these expenses. Don’t run a balance or use this card as a way of extending your household budget.
The goal here is to use this card to establish good credit, which means you need to pay on time and keep the balances low or balance-free.
Bankruptcy and Consumer Proposal
Sometimes the financial pressure on each person after a divorce can be too much to handle alone. Oftentimes, one or both parties file for bankruptcy or a consumer proposal. When person files, it can place a burden on the other party, making him or her responsible for the entire debt load.
Have you fallen behind in your debt payments because of a divorce? Get help to pay your debt down today and get your credit back on track. Call one of our trained credit counsellors at (855) 216-5095 or get started with our online debt analysis.
