It is not uncommon today for partners to enter a relationship with their own pre-existing debt then add to that debt after they’re married or common-law. Understanding the difference between financial versus legal responsibility for shared or co-mingled debts is critical, especially when one spouse is having financial problems. To help you, we’ve created a detailed guide with information you need to know about joint debts. You can also check out our handy infographic at the end of this post.
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What is a joint debt and how does it work?
When you borrow money with someone else, like your spouse, you are entering into a joint debt.
Generally, joint debts can occur when:
- Both parties apply for and sign a loan agreement as co-borrowers
- One party co-signs or guarantees payment of another person’s debt
How joint debts work:
With a joint debt, you’ve entered into a contract, therefore you and your co-signer share equal responsibility for all payments. Neither of you can opt out of responsibility for repayment of a joint loan. It’s important to understand that debt loads can’t be split 50/50. Both you and the co-signer are responsible for 100% of a joint debt. This is referred to as ‘joint and several’ liability. That means that if one party fails to meet their obligations, the lender will look to the other party for payment of the full amount of the debt.
Before co-signing or co-borrowing on a loan, make sure that you and your partner are on the same page and understand all the risks that come with sharing debt. When entering into this agreement, remember that you will have to pay the loan back if your partner cannot. The same conditions apply if you’ve co-signed or guaranteed someone else’s old debt. What’s more, both of your credit scores become vulnerable in the event of default, as you are both considered borrowers in the eyes of the lender and the credit bureaus.
What types of debts can be joint debts?
Almost any debt can be a joint debt including mortgages, car loans, lines of credit and credit cards.
Joint credit cards
Credit cards can be a bit more complicated to determine if both spouses are responsible for payment.
With a joint credit card, both parties have signed the credit card agreement and are equally responsible for the entire amount of debt incurred, not just half.
On the other hand, a supplementary credit card is an additional card for your spouse, adult child, or anyone else you allow to have added onto the card. The responsibility for the debt on a supplementary card often lies with the primary cardholder only. For example, you may have a personal credit card and allow a supplementary card for your spouse. Your spouse can make purchases on the account, but you would be responsible for all charges incurred on the card.
Note: There are specific terms and conditions with each credit card. Some credit cards will make the primary cardholder liable for all charges but also hold the supplementary cardholder liable. It is critical to read the terms of your credit card agreement carefully. Learn more about how responsibility is divided with supplementary cards.
Joint bank accounts and overdrafts
Many couples have a joint bank account. If this account has overdraft protection then, when this account is overdrawn, this becomes a joint debt. An overdraft is a borrowing facility like any other type of unsecured credit.
Co-signed and joint secured debts
Another common joint debt can be a mortgage secured by your family home. A car loan is sometimes also a secured debt when the lender takes the car as collateral for the loan. Both are common co-signed debts. Secured debts are not affected directly in a bankruptcy or consumer proposal if the payments on the secured debt remain current. If one spouse fails to make their payments, the lender may choose to seize the asset and look to the co-signer for any shortfall. If you have joint secured debts at the time of bankruptcy and want to keep those assets, it is important to keep up with all the monthly payments.
Am I responsible for my spouse’s debt?
A common misconception is that once you’re married, you’re automatically responsible for your spouse’s debt. This is not true. You are only liable for the debts on which you’ve co-signed because the law treats financial contracts as distinct from marriage. Only the spouse that signed for and incurred the debt is legally responsible to repay it.
If you had no debt before entering a marriage, but your spouse did, you should think carefully before agreeing to assume legal liability for your spouse’s debts or applying for a joint consolidation loan. Once you co-sign or guarantee payment, the bank or creditor will look to you for payment of the full amount of the loan if your spouse defaults. You can work on a repayment plan together without necessarily assuming legal liability for your spouse’s debts. Another advantage of keeping pre-marital debts separate legally is that you can preserve one spouse’s credit rating in the event one spouse defaults on the loan and finds they cannot repay their debt in full.
What happens to joint debt if my partner files for bankruptcy?
If you and your spouse have a joint debt for which you’ve co-signed, and your spouse files for bankruptcy or a consumer proposal, you’re still responsible for that debt. At that time, your spouse can no longer make payments towards a joint debt and creditors can pursue you for full payment.
Do both spouses have to file insolvency to deal with joint debts?
The answer is no, not necessarily. If one spouse has significant debts of their own plus some joint debts they may need to file a bankruptcy or proposal to deal with those debts. If the second spouse is still solvent (can repay their financial obligations) there is no need for that spouse to file, as they can continue to service their joint debt.
However, if you are both overwhelmed by debt, joint or your own, it may be best for both spouses to consider a bankruptcy or proposal. You can consider filing individually or filing a joint insolvency proceeding. Filing a joint consumer proposal, for example, can reduce the costs overall since there is only one file to administer. A Licensed Insolvency Trustee can help you understand how each spouse should proceed if you have joint debt and are unable to make payments towards it.
What happens to joint debt in a divorce?
If you are facing divorce, your joint debt won’t be split in two by the creditor or lender. You and your spouse will continue to maintain equal responsibility of ensuring that all debt owed is repaid, even after divorce.
Once your joint debt is paid off though, remember to remove your name from it so you’re not liable for any future debt incurred by your ex-spouse.
Even if you and your former partner signed a separation agreement and your ex-partner agreed to pay the joint credit card, you’re still liable for the entirety of the debt if they fail to make their agreed upon payments. Separation agreements are between you and your spouse, not you and the bank. Any missed or late payments will affect both of your legal obligations and credit scores, regardless of who was ‘supposed’ to pay in the separation agreement.
In the case of a separation or divorce, talk to your bank before you sign a separation agreement about the possibility of getting two separate loans in each of your names to replace a joint debt.
You might also be surprised to learn that you and your ex-partner can file a joint consumer proposal or bankruptcy, if needed, even though you’re no longer together.
We understand that joint debts can be confusing. If you have any questions or are unsure about how to manage debts on which you’ve co-signed, don’t wait. Speak to a Licensed Insolvency Trustee who can help you find the best debt relief option for you and your significant other. The sooner you seek help, the more options you may have available to you.