Getting married means making decisions about your finances as a joint entity, but one area that causes a lot of marital stress is debt. One spouse may still owe some pre-marital debt, maybe some student loans. Another spouse may not be as diligent paying off credit card balances and may have built up hefty credit card debt during the marriage.
Deciding to tackle debt repayment as a team is not the same as legally consolidating marriage debt. Here is what being married means for your debts
Bringing Debt into Marriage
Getting married does not make you responsible for your spouse’s debt.
The law treats financial contracts as distinct from marriage. Only the spouse that signed for and incurred the debt is legally obligated to repay the debt. Debts in your name will remain your debts, and debts incurred by your spouse or partner will remain theirs alone.
A husband or wife should think very carefully before adopting the other partner’s debt. While it is important to discuss each other’s financial situation and create a household budget to address common debt concerns, there is no legal reason for either spouse to assume responsibility for the other spouse’s existing debts once married.
New Debts – Joint Debt vs Personal Debt
New debts in a marriage can be more complicated. New debts may be personal debts owed by only one spouse, or they may be joint debts.
Just like premarital debt, your marital status alone does not create an automatic obligation for new debt incurred by your spouse. You cannot be held legally responsible for debt unless you sign for it yourself.
Depending on the nature of the debt you are applying for, a lender may
- require both spouses to sign a loan for debt as co-borrowers,
- allow one spouse to borrow if the other cosigns or guarantees the debt, or
- permit each spouse to acquire and assume individual personal debt.
If you cosign or guarantee debts, your lender will look to the second spouse if the first doesn’t make payment. These types of debts are commonly referred to as joint debts because you both are liable for repaying the entire loan.
From a practical standpoint, large debts – mortgages and car loans, high limit loans, and lines of credit – are almost always issued jointly to married couples. Lenders often look to the debt-to-income ratio of both spouses to prove they can afford the loan payments before qualifying a loan application. If a lender requires both spouses to sign for new debt, both spouses have a legal liability to repay the entire debt.
Marital Assets and Marriage Debts
Another common concern is what happens when a couple has marital property, like a home. Can a creditor seize family assets to collect on an unpaid debt?
If the debt is a secured loan, a mortgage or a car loan, for example, a creditor has the right to repossess the asset or collateral offered at the time the loan was signed if the loan is in default. This is why you should think very carefully before consolidating spousal debts with a joint consolidation loan through a secured debt using your home equity.
But what about unsecured debts like credit cards or tax debts. Can an unsecured creditor pursue marital property for money owed by one spouse? The answer is yes, but it’s complicated. An ordinary unsecured creditor, like your bank or a utility company, could obtain an order from a judge allowing them to place a lien on a debtor’s property, including the family home. The Canada Revenue Agency can place a tax lien on the property of the debtor without a court order.
Spousal Debts and Credit Score
One spouse’s credit score, bad or otherwise, will not affect their partner. Your credit report lists credit accounts that are in your name and provides a record of your credit history. Only accounts you have signed for legally will be included on your credit report and affect your credit score.
This is a common question if one spouse has high debts and is considering bankruptcy or a consumer proposal.
One of the most important things to remember at this point is the law treats each spouse as a separate and distinct individual. One spouse may need to file for bankruptcy – that does not mean the other spouse has to do the same thing. It is fairly common for one spouse to have financial problems serious enough to require a consumer proposal or bankruptcy, and for the other spouse to stay clear of the entire procedure.
Your filing bankruptcy, or a proposal, does not affect your spouse’s credit report.
Tackling Debt – Together or Separate?
What we typically see in a marriage is a mix of debts: yours, mine, and ours; your existing and new debt, my existing and new debt, and our joint debt accumulated since we got married.
If you are starting your marriage in debt, it’s not the end of the world. However, you don’t want the pressure of financial problems to lead to a relationship breakdown. The key is open, honest communication and a commitment by both partners to work together to pay off debt so you can build a less financially stressful life together.
Here are my top tips for dealing with marriage debt:
- Discuss a repayment plan ahead of time.
- Prepare a family budget.
- Postpone major purchases (and perhaps a family) until after the debts are dealt with.
- Consider carefully before cosigning on your spouse’s premarital debts.
- Don’t open a joint bank account at the same bank where one spouse owes any debt.
- Discuss any decision to take on new debt together.
- Consider a pre-nuptial agreement to protect any assets in the event of a marital breakdown.
If one or both spouses find themselves in severe financial difficulty after they’re married, it’s time to review your debt management options.
The options to deal with money problems after you are married are the same as those available to single people to deal with their debts, plus, the couple may have the option of dealing with them jointly (together).
Each couple in a marriage has these same debt relief options:
- Refinance or restructure your debt to make it more manageable. You need to decide if it makes sense to put up family- or jointly-owned assets as collateral or to cosign a new loan to support unsecured loans of only one partner. Remember, if you are not liable today, you will be if you cosign or guarantee your spouse’s debt.
- One spouse, or both spouses, can file a consumer proposal or bankruptcy to deal with their debts individually.
- The couple might have the option to file for joint debt relief.
The key is communication and exploration of your options. Marital debt issues can get complicated, especially if a divorce or relationship breakdown is also part of the equation. For advice on how to deal with the debt, contact a Licensed Insolvency Trustee for a free, confidential consultation.