1. Types of Joint Debt
Understanding the nature of your debt is crucial because different types of debt have different implications during divorce. Joint debt creates shared legal liability, while individual debt generally belongs to one spouse.
Joint Debt (Both Liable)
- Joint mortgages
- Joint lines of credit
- Co-signed loans
- Joint credit cards
- Joint car loans
- Business debts with personal guarantees
Individual Debt (One Spouse)
- Credit cards in one name only
- Student loans
- Personal loans in one name
- Pre-marriage debts
- Debts incurred after separation
Key Distinction:
Even if debt is in one spouse's name, it may still be considered a family debt if it was incurred for family purposes during the marriage. The court may order both spouses to share responsibility for family debts regardless of whose name is on the account.
2. How Debt is Divided in Alberta
Under Alberta's Matrimonial Property Act, family debts are part of the overall property division. The court calculates the net value of matrimonial property by subtracting debts from assets, then divides that net value.
The Division Process
- Identify all assets: List everything of value including home, vehicles, investments, pensions, and personal property
- Identify all debts: List all liabilities including mortgages, loans, credit cards, and taxes owing
- Calculate net value: Total assets minus total debts equals net matrimonial property
- Divide net value: The default is equal division, but courts may order unequal division in certain circumstances
- Allocate specific items: Determine which spouse keeps which assets and which spouse is responsible for which debts
Factors Courts Consider
- Purpose of the debt: Was it for family expenses or personal indulgences?
- Who benefited: Did both spouses benefit or just one?
- Ability to pay: Who has the income to service the debt?
- Who incurred it: Gambling debts or reckless spending may be assigned to the responsible spouse
- Timing: Debts incurred close to or after separation may be treated differently
3. Creditor Rights vs. Divorce Orders
This is one of the most important and least understood aspects of debt in divorce. A divorce order or separation agreement assigns responsibility between spouses, but it does not affect your obligations to creditors.
Critical Understanding:
If your name is on a joint debt, you remain fully liable to the creditor even if your divorce agreement says your ex is responsible. Creditors can pursue you for the full amount, damage your credit, and take legal action against you regardless of what any family court order says.
How This Works in Practice
Consider this scenario:
- Your divorce agreement says your ex will pay the $20,000 line of credit
- Your ex stops making payments
- The bank contacts you for payment because your name is on the account
- If you refuse to pay, your credit is damaged and the bank can sue you
- You may need to pay the debt, then pursue your ex separately to enforce the divorce agreement
The divorce agreement gives you the right to seek reimbursement from your ex, but it does not protect you from the creditor's collection efforts.
4. Handling the Matrimonial Home Mortgage
The mortgage on the family home is typically the largest joint debt. There are several options for dealing with it:
Option 1: Sell the Home
List and sell the property, pay off the mortgage from the proceeds, and divide any remaining equity. This cleanly severs the financial tie between spouses. May trigger mortgage penalties if the term is not up.
Option 2: One Spouse Buys Out the Other
The spouse keeping the home refinances the mortgage in their name alone and pays the other spouse their share of equity. The departing spouse must be removed from both the title and the mortgage.
Option 3: Continue Joint Ownership
Sometimes couples agree to keep the home jointly for a period (often until children finish school) and sell later. This is risky because both remain financially tied and liable.
Option 4: Assume the Mortgage
If the lender agrees, one spouse may assume the existing mortgage. This avoids refinancing costs but requires lender approval and the assuming spouse qualifying on their own income.
Key Point:
Removing a name from the title is not the same as removing liability from the mortgage. You must address both separately. Being removed from the title but remaining on the mortgage leaves you fully liable for a property you no longer own.
5. Credit Cards and Lines of Credit
Joint credit accounts and lines of credit require careful handling during separation.
Immediate Steps to Take
- Remove supplementary cards: If your spouse has a supplementary card on your account, cancel it immediately
- Freeze joint accounts: Contact the lender to freeze the account so no new charges can be made
- Pay down joint debt: Work to pay off joint credit as quickly as possible
- Transfer balances: Consider transferring your portion to an account in your name only
- Close accounts: Once paid off, close joint accounts
Options for Handling Existing Balances
| Option | Pros | Cons |
|---|---|---|
| Pay off immediately | Cleanest solution, ends liability | May not have funds available |
| Split and transfer | Each responsible for their own portion | Requires lender cooperation |
| One spouse takes over | Simplifies management | Other remains liable if not removed |
| Pay over time jointly | Spreads cost | Requires cooperation and trust |
6. Protecting Yourself
There are several steps you can take to protect yourself from your spouse's failure to pay assigned debts.
Proactive Measures
- Close or freeze joint accounts: Prevent new debt from being incurred
- Monitor your credit: Check your credit report regularly for missed payments
- Require refinancing: Insist that debts your ex keeps be refinanced in their name only
- Build in security: Consider requiring security (like a lien on property) for amounts your ex owes
- Document everything: Keep records of all debt amounts, payments, and communications
If Your Ex Stops Paying
- Pay the debt yourself to protect your credit (if you can afford to)
- Document the payments you make
- Apply to court to enforce the separation agreement or divorce order
- Seek a judgment for the amounts paid plus costs
- Consider enforcement options like garnishment or registration of the judgment
7. Indemnity Clauses
An indemnity clause is a provision in your separation agreement where one spouse agrees to protect the other from losses related to certain debts. While not foolproof, indemnity clauses provide important protections.
What an Indemnity Clause Provides
- Contractual right to be reimbursed if you must pay the debt
- Ability to recover legal costs incurred in collection
- Clear documentation of who agreed to be responsible
- Basis for court enforcement if needed
Sample Indemnity Language
"[Spouse A] shall indemnify and save harmless [Spouse B] from and against any claims, demands, costs, expenses (including reasonable legal fees on a solicitor-client basis), or losses arising from [Spouse A's] failure to pay the debts set out in Schedule B, and shall reimburse [Spouse B] for any amounts paid by [Spouse B] to satisfy such debts."
8. When Your Ex Files Bankruptcy
If your ex-spouse files for bankruptcy, the implications for joint debts can be severe.
Impact of Bankruptcy on Joint Debts
- Your ex's liability for joint debts is discharged in their bankruptcy
- You remain fully responsible for the entire joint debt
- The creditor can and will pursue you for 100% of the amount
- Your indemnity clause becomes worthless (it's an unsecured claim in the bankruptcy)
- You cannot enforce the indemnity against the bankrupt spouse
Protect Yourself:
If your ex has significant debts assigned to them and shows signs of financial distress, prioritize getting joint debts refinanced in their name only or paid off. Once they file bankruptcy, you lose your practical ability to enforce their obligations.