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How to Split Debt in a Divorce: What You Need to Know

The average Canadian carries substantial debt. In addition to credit cards, many residents struggle to pay a mortgage, car loan, or personal loans. Some of our friends and neighbors go into debt just to pay for the expenses of daily living.

When a couple divorces, they often confront their debts for the first time in years. Some are shocked at how much they racked up. Others are confused about who will pay what debts.

Contact RPB Family Law if you need help in divorce or if you are thinking about divorce but want more information. Below, we highlight Ontario’s law on the division of debts and provide other tips. Call us to speak with a divorce lawyer.

How the Family Law Act Affects Your Divorce

According to the Family Law Act, a spouse will leave the marriage with the debts in their name (although personal debts do impact the calculation of the equalization payment). Some common debts include:

  • Student loans
  • Credit cards
  • Personal loans
  • Mortgage

However, most married couples have joint debts. These can take the form of a mortgage for a home which a couple bought while married or a joint credit card. In this situation, the Family Law Act says each spouse is jointly responsible for joint debts.

Is a Debt Separate or Joint?

Sometimes it is easy to tell. For example, your spouse might have entered the marriage with credit card debt. This debt remains his debt, and they should be responsible for any balance which remains when you divorce.

But what happens if your spouse opens a credit card while married? If both names are on the card, it is a joint debt. However, your partner might have only put their name on the card. Is this a joint debt or not?

Let RPB Family Law review.

Marriage Contracts and Debts

Another consideration is whether a couple signed a valid prenuptial agreement, also called a marriage contract. This agreement could have assigned certain debts to one spouse in the event of divorce. Couples often like marriage contracts because they bring much needed clarity to the issue of dividing debts.

Imagine one spouse has a small business in their name. This spouse will likely take out debts to help the business grow. Each spouse can protect themselves in the event of divorce by signing a marriage contract which assigns the business equity and debt to one spouse – possibility even with an agreement that the business or business debts will not be equalized through the equalization process..

Generally, Ontario judges will uphold a marriage contract if it was created in a valid manner with the assistance of lawyers and full and frank legal disclosure. Share with your Ontario divorce lawyer a copy of a marriage contract so that we can analyze how it will impact the division of debts.

Principles Governing the Division of Debt

Dividing debt is difficult to untangle from the division of family property. For this reason, we must discuss debt division along with how equalization payments work.

The below is a very high level, summarized, description of the equalization process – all factors in the Family Law Act are not addressed, do not take the below as legal advice. 

In an Ontario divorce, to calculate equalization, you must review all assets the couple owned on the date marriage and owned at the date of separation, including real estate, motor vehicles, investments, and other various assets and debts. 

The court will determine the Net Family Property (NFP) for each spouse. This calculation is complicated but requires understanding each spouse’s property and debts:

1.       The court determines the value of each spouse’s property at the date of valuation. Consequently, a home might need to be appraised and other assets assigned a value.

2.       The court subtracts all debts from assets. The result is the total value for each spouse at the valuation date.

3.       The court determines the value of the assets each spouse brought into the marriage at the date of marriage. Some assets will increase in value over the course of the marriage. For example, a spouse might have owned mutual funds when they entered marriage which grew 200% over the 15 years of marriage. The spouse can deduct the value at marriage but not the increase.

4.       For each spouse, the court subtracts the date of marriage net assets from the valuation date net assets. The resulting number is each spouse’s Net Family Property or NFP. Invariably, one spouse has a higher NFP than the other (although both spouses could have zero Net Family Property and thereby no equalization owning)..

5.       The court will subtract the lower NFP from the larger one. The difference is divided in half, which is the equalization payment the spouse with the larger NFP pays to the other.

Share detailed information with your divorce lawyer about your individual and marital debts. Those impact the calculation of NFP and, ultimately, an equalization payment.

Should You Divide Debt 50/50?

Maybe not. We have gone into a discussion of NFP calculations because you might be entitled to a larger equalization payment depending on your debts. Simply agreeing to pay 50% of all debt could be the wrong choice, putting you in a financial hole.

Instead, we might seek a larger equalization payment to make up for larger debts. The Family Law Act allows a judge to award a larger or smaller payment in various situations, including whether liabilities or debts were incurred in bad faith or recklessly. For example, one spouse might have had a gambling addiction and racked up debt. They may have to be solely responsible for that debt.

Contact an Ontario Divorce Lawyer Today

Anyone contemplating divorce should quickly call RPB Family Law. Instead of negotiating a divorce settlement at your kitchen table, you should work with an experienced Ontario divorce lawyer.

Ontario could certainly make their divorce laws simpler. Until then, men and women should hire a seasoned lawyer to review their assets and liabilities. We can advocate so that you do not end up paying an unduly large share of debts. Call us today!

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