When Love Fades But Debt Lingers: Financial Tips For Separation

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.

Responsibility for joint debt

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.

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.

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.

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.

How to address joint debt

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.

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.

Protecting your credit rating during a separation or divorce is essential, as your credit score can be negatively affected if your ex-partner fails to make agreed upon payments on joint debts. To safeguard yourself, set up alerts to minimize the risk of missed payments affecting your credit. Regularly monitor joint debt accounts through online banking and request free copies of your credit report from both Equifax Canada and TransUnion Canada to catch any issues early. Where possible, work toward eliminating joint debts to reduce the risk of your credit being impacted by your former partner’s actions.

For revolving accounts that can’t easily be closed, such as a Home Equity Line of Credit (HELOC), contact your lender to restrict the account to deposit-only status. This will allow payments to be made while preventing either party from withdrawing funds during the separation process without mutual consent. As soon as possible, close or convert a joint line of credit into an individual account to further secure your financial independence.

Establish credit in your own name

Establishing individual credit is a key step toward financial independence after separation or divorce. If you’re building credit from scratch , a cell phone contract or secured credit card are two good options to begin building your own credit rating. This is essential for securing loans, rentals, a job or other financial needs in the future. Be strategic when applying for credit because multiple credit inquiries can temporarily lower your credit score, so research and choose credit products that align with your financial situation.

Debt help options when bills become overwhelming

When joint debts become overwhelming , consider exploring debt management options such as a debt management program through a non-profit credit counselling agency or a consumer proposal with a licensed insolvency trustee.

These solutions can be pursued individually or jointly, though joint efforts require strong communication and clear expectations to ensure both parties remain committed to the chosen debt relief option . Should one person decide to declare bankruptcy , it unfortunately means any co-borrowers will need to take over payments in full.

• How to regain control during high-stress financial and life events
• Summer vacation planning when money is tight

Navigating the financial aspects of ending a relationship can be overwhelming. However, professional guidance and careful planning can help address concerns effectively and protect your financial interests during this transition.

Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.