It would be natural to believe that the number-two issue in every divorce (after determining custody of the children) is dividing the piles of property and other wealth acquired during the marriage. Tabloid headlines and TV gossip shows tend to focus our attention on celebrity divorces like those of Gerry Hall and Mick Jagger, members of the Royal family and even big corporate names who generally manage to stay out of the limelight. These stories often detail the splitting up of global properties, expensive cars, jewels, artwork, and other exotic baubles. The reality, however, for most people is quite different: for many Canadians, the real burden of divorce comes when dealing with the four-letter word “debt.”
This is no secret among divorce lawyers. We’ve all met husbands or wives during divorce consultations who, after completing the Financial Statements, exclaim: “I can’t afford to divorce!” Separation and divorce would bring their credit-laden life tumbling down. Mortgaged homes, credit lines, loans from family members and other forms of debt have kept their marriage and lifestyle afloat — often for many years. When the separation happens, the couple must struggle to face up to the repayment of all of that money.
In many marriages, the strain of operating under the debt has actually contributed to the eventual breakdown of the marriage. This doesn’t mean that debt equals divorce. Many couples live very happy lives building up, paying off, and building up again heavy debt loads. They merrily acquire homes, expensive cars, vacation property, and all the other pleasures of life courtesy of first and second mortgages, credit lines, and other elaborate forms of debt. Such couples are comfortable with debt in their financial plan.
For others, it’s not the debt, but rather the inability of the respective spouses to cope with their spouse’s idea of financial planning in their marriage. I have seen cases in which a wife couldn’t sleep unless all credit cards had a zero balance at the end of each month — her financial ethic couldn’t tolerate even the smallest amount of debt. By contrast, her husband, a flamboyant businessman, was accustomed to keeping his small business afloat using his personal credit cards. In some situations, he was content to make minimum monthly payments on a huge credit-card balance over several months, confident that sometime in the future he would be able to pay off the entire balance. He was happy; she was not — and the marriage suffered.
Of course, at the point of separation and divorce, it’s too late to make these assessments of one’s partner. Couples planning to marry should take time to ensure that their approach to financial planning is on the same wavelength. What is your debt tolerance level? What are your respective track records? Spenders and savers do not usually combine comfortably.
Here’s what you need to know about debt and divorce in Canada.
What is debt?
We all know what debt is: owing somebody money! However, the variety of its forms in this day and age can be a little overwhelming. Consider the following list of typical debts in Canadian families:
- Credit-card balances
- Mortgages on home and/or cottage
- Overdraft Protection Line of credit (secured and unsecured)
- Car loans and leases
- Consumer loans
- Renovation loans
- Construction loans
- Judgments against a person
- Arrears of child and/or spousal support
- Personal guarantees of corporate/business debts
- Taxes owing (income, property, GST, capital gains, etc.)
- Student loans
- Unpaid tickets and fines
- Overpayments that must be refunded
- Arrears on all manner of personal accounts ranging from cell phones to hydro bills
- Money borrowed from family and friends.
Do any of those sound familiar? To some families, they all sound familiar — and scary.
Why is debt and divorce in Canada important?
Debt is a part of marriage and a part of divorce, but it’s also a part of starting over. As the now ex-husband and ex-wife move on to their new lives, the way in which they managed debt left over from the marriage will have a direct impact on a number of matters. First of all, it can be very difficult to start over if your credit rating has been destroyed or undermined by debts left from the first marriage. Obtaining a credit card or renting an apartment can become impossible. Debt can hold you back.
If each spouse has taken responsibility for the repayment of some of the marriage’s debt, their reduced disposable cash can create a long-term burden. This can be particularly difficult when an asset is worth far less than the debt associated with it. I have seen an ex-wife struggle to repay a loan on a power boat she never wanted — and the outstanding indebtedness was thousands of dollars more than the value of the boat. It can be a bitter pill to swallow, especially when the marriage is long gone but the debt remains (and the boat sits in disrepair in the driveway).
It can also be difficult when the debt has forced the sale of an asset that had a particular emotional or sentimental value. In one case, a family cottage in the Muskokas that had been in the husband’s family for generations was mortgaged to subsidize the family’s lavish lifestyle in Toronto. After the divorce, the cottage was lost to the bank. The loss of a piece of the family heritage of that magnitude caused embarrassment and a lengthy depression for the husband.
The respective ability of a husband and wife to carry a debt after separation and divorce also influences the amount of cash available for child and spousal support. It can be disheartening to deny your children certain necessities because of a pile of credit-card debts.
Last but not least, the debt can be so overwhelming that it triggers a bankruptcy for one or both spouses. Debt management before, during, and after separation can have long-lasting consequences.
Who’s responsible for the debt?
All creditors have one thing in common: they want to be repaid. They don’t care who pays them as long as someone does. A painful divorce — even for those who have a long-standing relationship with a creditor — will not soften a creditor’s heart. Remember, they have bills to pay too and are probably under pressure to collect. In some cases, a separation will cause panic among creditors when they suspect that it will delay repayment or make collection unlikely. In other situations, there may be a feeling of relief that the debt will finally be dealt with in the context of the divorce. Perhaps the equity in the home will be used to retire the debts. Anything — as long as the bill is paid.
Who gets which debt?
Just as every asset must be divided and assigned to the husband or the wife when they separate and divorce, every debt must be paid, assigned, or dealt with in the context of the divorce as well.
Timing has a great deal to do with responsibility for debts and for the management of them. If at all possible, a couple about to separate should retire as much debt as possible before the actual split. This means sitting down together and taking a long hard look at the debt picture and agreeing to accept personal responsibility for paying off individual credit cards, loans, and other debts. This can be fairly straightforward if the debts have been incurred in the name of only one of the spouses.
As a general rule, the spouse who incurred the debt is responsible for it. For example, if the husband has a student loan outstanding from his university education, then it will be his responsibility to see it paid in full. If the wife owes Revenue Canada for back taxes for income earned two years ago, then it should be her job to retire that debt. Federal and Provincial governments do not expect spouses to pay student loans for their partners nor does Revenue Canada expect a spouse to pay the other’s back taxes. He who borrows must repay.
As a general rule, spouses who incur joint debts are jointly responsible for the full debt. This means that if a couple has a joint credit card, a joint line of credit, or joint overdraft protection, they are each responsible for the full amount of the debt.
Where there are several such joint debts the couple can agree to assign responsibility for payment of the joint debts to one another. In other words, the husband may take responsibility for the joint debt owed to the Royal Bank while the wife agrees to be responsible for the joint debt owed to Canada Trust. Unfortunately, this agreement between the spouses is not binding on the financial institutions who will continue to hold both of them responsible for any unpaid balance of the joint debt.
Where there is an asset associated with debt it is appropriate for the debt to follow the asset. If the husband is keeping a boat or vehicle that is subject to a loan, then he should take responsibility for the loan associated with it. In some cases, it may mean selling the asset and applying the proceeds to the loan. Often there will still be an outstanding balance to pay.
The bottom line is that at the time of separation, creditors will look to both spouses for payment in full of joint debts regardless of their individual agreements with respect to payment. Lawyers will be aware of this and can try to build additional protections into Separation Agreements should one spouse not live up to their commitment to pay a certain debt.
Debt for necessities
Each province in Canada has a provision permitting spouses to incur debt in the name of the other if it is to provide what are known as the “necessities of life.” The Family Law Act of Ontario, for example, provides in Section 45 that during cohabitation a spouse has authority to render himself or herself and his or her spouse jointly and severally liable to a third party for necessities of life. This applies unless the spouse has notified third parties that he or she has withdrawn the ability of the other spouse to pledge his or her credit for these necessities. Necessities include such things as food, shelter, clothing, medical care, etc.
The key here, of course, is the fact that the authority lasts only so long as the couple is cohabiting. However, once the separation occurs the debts must still be paid by both spouses. It is conceivable that a spouse, although cohabiting, anticipates the separation and pledges the other spouse’s credit for necessities that would facilitate the establishment of a new residence. This would include, for example, a deposit for rent, obtaining of utilities and stocking up on food. In such a case, the debt that is incurred is joint and several. This means that both spouses are responsible for the debt and each can be called upon to pay the debt in full.
Debt and property division
The foregoing sections consider the role of debt at separation and the respective spousal obligations to repay it. However, under Canadian law, debt also plays a significant role in the division of marital property. The goal of provincial family laws is to provide for an orderly and equitable settlement of the affairs of the spouses upon the breakdown of what amounts to a marriage partnership. This means that the partnership must decide how to share the wealth accumulated as well as any debt accumulated by the partners.
The Family Law Act of Ontario establishes a property division scheme that seeks to determine the respective net values of the spouses at the time they married and at the time they separated. The goal is to divide equally any increase in these respective net worths during the course of the marriage.
In order to determine the net worth, debt incurred by either spouse is deducted from the value of the property. For example, if the husband during the course of the marriage acquired a valuable Canadian Olympic coin collection worth $50,000.00, but borrowed $10,000.00 to make a purchase of particular coins, the net worth of the asset is $40,000.00.
Subsection 4(1) of The Family Law Act defines net family property as “the value of all of the property that a spouse owns on the valuation date, after deducting … the spouse’s debts and other liabilities.” This means that for the purpose of calculating the spouses’ respective interests in property at the time of separation, any debt associated with the spouse is deducted from the property value. If it turns out that the net worth of the husband is $200,000.00 and the net worth of the wife is $100,000.00 then there is a difference of $100,000.00. The husband would make a payment to the wife of $50,000.00 to equalize their respective net family properties after the separation. This formula incorporates their respective debts in determining who takes what from the marriage — if there is anything left.
Debt to family
It is in this context that lawyers must scrutinize alleged loans from family members. Lawyers are sometimes told that one or both spouses actually owe “thousands of dollars” to their parents and they expect to be able to deduct this debt from their net family property, thereby reducing the amount they might have to pay to their spouse.
Fortunately, the Courts have seen through these attempts and, in the absence of concrete evidence of an actual loan, the Judge will find that the money was a gift rather than a loan. In at least one circumstance, the Court found that a spouse’s insistence that he had a “moral obligation” to repay sums of money to family members did not make it a debt. It was considered to be more akin to the return of a gift.
The financial statements that must be completed by spouses have sections that call for the detailed description of all debts and liabilities as of the date of the marriage and as at the date of separation.
Debt is a factor that will affect the spouses’ pocketbooks directly. The loans and debts must be repaid and will affect their ability to take their share of the assets from this dissolving marriage partnership as they each move on to a new life.
Divorce and bankruptcy
In some circumstances, there simply are not enough assets or earnings to repay the debts. If this is the case, both spouses must take a long hard look at the option of bankruptcy — understanding that it will only eliminate certain kinds of debts and that it may have catastrophic consequences for their credit rating in the future.
Arrears of child support cannot be avoided through a bankruptcy, and joint debts which have been assigned to one spouse for repayment will not be wiped out by the bankruptcy so long as the creditors see the other spouse as a potential source of repayment. Enterprising divorcing couples have attempted to assign all debts to one spouse and all assets to the other in the hope the spouse with the debt could go bankrupt thereby preserving the family’s wealth for the other spouse. Creditors will not allow joint debts to be avoided in this way and are in many cases prepared to go back through the family history for the previous years to determine if transactions were made fraudulently in an attempt to avoid repayment of debt in the bankruptcy.
What can be done in the face of debt?
Assuming the couple is still cohabiting, every effort should be made to repay debt in advance of the separation and divorce. This may mean sitting down together and developing a debt repayment plan. The starting point for any such plan is gathering detailed and complete information about every debt of each spouse including the name of the institution, the amount of the debt, the rate of interest that is accruing, the possibility of settlement of the debt, the possibility of consolidation of the debt, and so on.
It’s appropriate to take steps to ensure that no further debt is incurred with respect to joint accounts. There is a need for caution in dealing with one’s spouse at this stage. It is not unheard of for one spouse to take the joint line of credit to the limit in anticipation of the separation so that he or she would have a nest egg for divorce-related expenses — such as retaining a lawyer or paying for a new car or accommodations.
Once the details of the divorce picture are clear, it might be appropriate for the couple to approach a non-profit organization for credit counseling. Ads for such organizations are published in the Yellow Pages and other locations. If there is a large debt and/or significant assets, consider retaining the services of a good financial planner who may be able to find a way to maximize the position of the couple at the time of their separation and divorce.
When it comes to debt and divorce in Canada, dividing debts and assets can be a complex process. It’s a very real test of husbands and wives in difficult circumstances trying to protect themselves, their children, and their future. Debt is a fact of life in most Canadian marriages and is, therefore, a fact of life in most Canadian divorces. In dealing with that reality, there’s no substitute for thorough information about the actual debt and good advice from a lawyer or a financial planner in how to best deal with it.
Michael Cochrane is a Toronto lawyer practicing with Ricketts, Harris Barristers & Solicitors. He is also the author of two books about divorce — Surviving Your Divorce and Surviving Your Parents’ Divorce — a book about marriage contracts —For Better or for Worse (, and a regular columnist for The Wealthy Boomer magazine.