Spousal Liabilities 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 is important to understand marital debt, which refers to any debt taken on during your marriage.

In this article, we will be covering what martial debt is, the difference between joint and individual debt, how you can protect yourself from your spouse’s debt and strategies for managing debt while married. Let’s dive into it!

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, debt levels and payment history stay separate if you do not sign up for joint debt.

Joint debt is when two parties, in this case, you and your spouse, are responsible and liable for the debt. This includes co-signing a loan together or getting a joint credit card. When you and your spouse sign up for any sort of joint agreement, you are both entering a legal agreement with your creditor, such as the credit card company.

This means that if you do have joint debt and you or your spouse stops making payments, both of you could be responsible for the entire debt, not just half. Both of you will be responsible for the account or debt until it is fully paid off and settled.

It is also important to note that if you and your spouse decide to get a divorce, both of you are still equally responsible for any joint debt.

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

Before getting married, you should have an open, honest conversation with your partner about finances. Knowing exactly where each of you sits with your finances and how you manage your money will also help strengthen your relationship.

When discussing finances, you should go over assets and debts. How much do each of you have and how much do each of you owe? You could even 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. This agreement is a written contract before a couple enters marriage or a civil union. It defines and addresses the division of assets in the case that the marriage does not work out for whatever reason. It could also be an effective way to avoid court proceedings and minimize any financial or emotional toll.

For those already married, a postnuptial agreement can help. It is 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 do not 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, do not 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. This can also open great conversations about building a better relationship with money.  After all, you are both in it together!

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. Let’s go over both and what they mean.

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. A co-signed debt will appear on their credit reports and can influence their credit as if the debt were their own.

Why would someone be a co-signer? They act as a safety net for lenders, if they have limited income, low credit scores, or little to no credit history. Bringing a co-signer in could help strengthen the lender’s application and increase the chances of them getting approved, for maybe a mortgage or auto loan.

An authorized user, however, can use someone else’s credit card but is not legally responsible for paying the bill. They will be able to use the card as if it were their own, but the responsibility to pay any charges remains with the primary cardholder.

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 Premarital 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

If you are about to walk down the aisle but your future spouse has debt incurred, such as school loans, auto loans, or payday loans, there are a few things you can do together to tackle it before you tie the knot.

Create a Debt Repayment Plan

Set a budget, prioritize debts by interest amount, or explore your debt-relief options with a debt expert. You have several options that you can consider when dealing with debt. For setting a budget, you can list out your income and expenses to see how much money you can set aside each month to tackle your debt. When it comes to prioritizing your debt by amount, you can either tackle the debts with the highest interest with the avalanche repayment strategy. Or you can work to pay off the smaller ones first with the snowball repayment strategy.

It is also worthwhile reaching out to a debt expert to explore the options you have, including a consumer proposal. A consumer proposal is a great debt-relief solution offered by the government that can reduce or eliminate your debt. It is a formal and legally binding debt settlement agreement between you and the companies you owe money to. It can help you keep your assets, stop collection calls, and reduce your debt, often by up to 80%.

Discuss Financial Goals

Have open discussions about financial goals as a couple. This includes managing premarital debt while saving for future milestones, like buying a home or saving up for a child’s education fund. This is a good idea before you begin this lifelong journey together! It could also help you keep your eye on the prize and be a motivation for both of you to pay off your debts. This could be a great way to map out your future as a couple.

Once you both determine your financial goals, then you can figure out how you will work toward them. Will you use a planning app on your phone to set milestones? Or maybe schedule check-ins and reminders with one another to see how you are progressing? The key is coming up with a plan that is attainable and works for both of you.

Consider Legal Agreements

A prenuptial agreement can define how premarital debts will be handled in case of separation. As mentioned above, it defines and addresses the division of assets in the case that the marriage does not work out for whatever reason.

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!