Spousal Liability for Debts: Your Financial Responsibilities

Wedding bells do not prepare you for this: Your partner reveals a massive amount of debt just before you walk down the aisle. Should you be worried about saying ‘I Do’ to their debt? The general answer is no. You are not automatically responsible for your spouse’s debt once you are married. However, it’s important to understand marital debt, which refers to any debt taken on during your marriage.

What is Marital Debt?

Marital debt includes any debt you and your spouse take on during your marriage, such as credit card balances, car loans, or mortgages. Since both of you benefit from these expenses, you share the responsibility of paying them off. How marital debt is handled can vary, so knowing the rules in your area is essential.

What is the Difference Between Joint and Individual Debt?

The good news is that individual debt still exists after marriage. This means any debt you take on by yourself, without your spouse’s involvement, remains yours alone. Your credit rating, debt levels, and payment history stay separate if you do not sign up for joint debt. However, if you do have joint debt and your spouse stops making payments, you could be responsible for the entire debt, not just half.

How Can I Protect Myself From My Spouse’s Debt?

Before getting married, have an open conversation with your partner about finances. Go over assets and debts, and consider swapping credit reports to ensure transparency. If one of you has significantly more money or potential earnings, a prenuptial agreement might be a smart way to protect yourself from future debts. For those already married, a postnuptial agreement can help. It’s like a prenup but signed after marriage. It clarifies who is responsible for any debts from before marriage and sets clear financial expectations if things do not work out.

Understanding Spousal Liability for Debt

Common Law Relationships in Canada

In Canada, common-law partners don’t automatically share property or debt. Each person keeps what they brought into the relationship or earned individually. This means you are not responsible for your partner’s debt unless you explicitly agree to share it. If your common-law partner has a lot of debt, don’t panic! Work together to create a plan to manage the debt as a team or set some ground rules for handling shared debt in the future.

Authorized User vs. Co-Signer

People often confuse the roles of an authorized user and a co-signer, but they are quite different in terms of responsibility. A co-signer agrees to be fully responsible for a loan if the main borrower cannot pay. This means you are on the hook for the debt. An authorized user, however, can use someone else’s credit card but is not legally responsible for paying the bill. Being an authorized user can still affect your credit score. If the primary cardholder makes payments on time and keeps the balance low, it can help build your credit score. However, if they miss payments or rack up a high balance, it can negatively impact your credit as well. So, it is important to be aware of how the primary cardholder manages the account.

Managing Pre-Marital Debt

Debt incurred before marriage remains the responsibility of the individual who took it on. If you are wondering, “If my spouse takes out a loan, am I responsible for it if it was before our marriage?”, the answer is no. They’re still solely responsible for paying it off, even after marriage.

Strategies for Dealing with Premarital Debt:

• Create a Debt Repayment Plan: Set a budget, prioritize high-interest debts, or consolidate debts to simplify payments.
• Discuss Financial Goals: Have open discussions about financial goals as a couple. This includes managing pre-marital debt while saving for future milestones, like buying a home.
• Consider Legal Agreements: A prenuptial agreement can define how premarital debts will be handled in case of separation.

How to Handle Debt During Marriage

Debt taken on during marriage is often treated differently. In Canada, how this debt is managed can depend on various factors, including who signed for the debt and the purpose of the debt.

• Shared Responsibility: If both spouses’ names are on a loan or credit account, you are both equally responsible for repaying the debt. So, you are probably asking yourself if “my spouse takes out a loan, am I responsible for it?”. If your name is on the loan, then yes, you share the responsibility.
• Individual Responsibility: If only one spouse signs for a debt, that spouse is typically responsible for repaying it. However, if the debt was incurred for the household’s benefit, it may still be considered a shared responsibility.
• Purpose of the Debt: Courts may consider the debt’s purpose when determining responsibility. Debts incurred for family needs, like a mortgage, are often seen as joint responsibilities, while personal expenses may remain the responsibility of the individual who incurred them.

Divorce and Debt Responsibility

When a marriage ends, dividing assets and debts can be challenging. In Canada, it all depends on factors like the type of debt and any agreements made beforehand.

• Equitable Distribution: The court aims for an equitable distribution of assets and debts during divorce, considering each spouse’s financial situation and contributions.
• Prenuptial and Postnuptial Agreements: These agreements can dictate how debts are divided, specifying which debts remain individual responsibilities and which are shared.

Protecting Yourself Financially

It is important to take steps to protect your financial well-being in a marriage. Regularly discuss your financial goals, review credit card and loan statements together, and consider setting up separate accounts for personal spending. A joint budget can help keep you and your spouse aligned on spending and saving. Navigating debt in a marriage can be overwhelming, but you don’t have to do it alone. At Farber, we offer expert guidance to help you and your spouse manage debt effectively. Whether it’s developing a repayment plan, understanding your legal rights, or exploring debt relief options, Farber can provide the support you need to secure your financial future. Contact us today to learn how you can take control of your finances!