When love fades but debt lingers: Financial tips for separation

It is important to protect your financial interests despite the stress of separating finances on top of the emotional challenges of ending a relationship, writes Mary Castillo. Photo by Getty Images/iStockphoto

Article content

Navigating the financial aspects of separation or divorce can be challenging, particularly with joint debts and shared assets. However, to create a stable financial future, it is important to protect your financial interests despite the stress of separating finances on top of the emotional challenges of ending a relationship. To make the process easier, avoid working through it alone. Draw on the expertise of professionals such as lawyers, accountants and financial advisers to help you make informed decisions. Here are key things to keep in mind.

Article content

Article content

Responsibility for joint debt

Article content

Article content

Article content

Joint debts and obligations, such as mortgages, loans, credit cards, overdraft or condo fees, remain a shared responsibility even if you and your former spouse are legally separated or divorced. Both parties remain fully accountable to each creditor for 100 per cent of the debt, unless it is renegotiated, because a legal agreement to dissolve a relationship is only an agreement with each other, not your creditors. To remove one party’s liability for a debt, with the creditor’s approval, it needs to be refinanced or transferred into a single borrower’s name.

Article content

Many people believe that joint debt is a 50/50 responsibility. However, joint debt is 100/100 responsibility. If you and your ex-partner agree to split payments on a joint debt and one person stops paying, the other is legally required to cover the full contractual amount. Missed payments can lead to penalties or damage to both credit scores.

Article content

In addition, if a joint debt falls behind and one of you has a non-registered savings account at the same financial institution, that bank or credit union can exercise the right of offset and withdraw funds from your savings account to cover the arrears. Joint and co-signed debts are each borrower’s responsibility, and may affect a guarantor as well, so separating your finances when dissolving a relationship needs to be a priority.

Article content

Article content

This may mean opening new bank accounts in only your name at a different financial institution from where you hold joint accounts or debts. Direct all future income, such as salary, benefits and payments administered by the Canada Revenue Agency, into your new account to avoid mixing funds with your former partner. This also minimizes the risk of the right of offset affecting the money you do have and helps establish financial independence.

Article content

Article content

How to address joint debt

Article content

Addressing joint debts and lines of credit is critical to safeguarding your financial stability during a separation or divorce. Start by exploring options to transfer joint debts, such as a mortgage or car loan, into one person’s name. This requires that an individual can qualify independently based on their income and credit rating. It may also require refinancing or a title or ownership change, so consult with your lender to confirm their eligibility requirements and terms.

Article content

If refinancing isn’t an option, aim to pay off your joint debts and close joint accounts at a zero balance to prevent future use. If separating the debt is temporarily not possible, have a lawyer help you to clearly document in writing who is responsible for making the payments and that neither party is to incur additional joint debt.