Are you Responsible for your Spouse's Debt in Canada?December 20, 2022
Table of Contents Contents
Separation and Debt
When it comes to covering the bills during a separation, generally the person who stays in the home. That being said, if there is any joint debt, you are both still responsible for it. If one doesn’t pay the joint debts, then the other is affected by that as well.
The general idea in a separation agreement is to get rid of any joint debt as soon as you can. Whether that means refinancing, selling your home to pay for all the joint debt and split the equity, or buying the other party out. In some cases even refinancing, which may be the case if the credit account you are dealing with is a car loan.
You are not legally responsible for any credit accounts that are in just their name though unless it is considered to be family debt where you live. If that is the case you aren’t responsible to creditors, it is still considered a part of your financial obligations but it will just be part of your separation agreement. They are two separate things. You are only legally responsible if your name is on the debt. The joint accounts that your name is tied to are the only accounts that can affect your credit report. That being said, many still choose to help with debt payments during separation if they were the primary breadwinner in the relationship. This can make the transition smoother, but it really depends on the financial situation of both parties.
Debt Responsibility and Death
If your spouse dies are you responsible for their debt? Well, no. In Canada, debt can’t be inherited. This means, if your name isn’t tied to the account, then you do not have to pay for it. If your name is tied to the account, it is important to check what kind of insurance is on that loan and if it is covered in the event of accidental death. Your financial situation often changes in the event of a spouse's death so knowing what insurances you have and having life insurances in place can help alleviate some of these stresses.
What about Credit Card debt?
While you are not directly responsible for your spouse's credit card debt in the event of death, it does become part of their estate. In this case, the estate will need to pay off the credit card accounts. If you are in charge of the estate then it is your responsibility to pay it.
Creditors will have a claim on the estate as well. This means that before any inheritances can be claimed, the credit card companies do need to be paid in full.
Can You Inherit Tax Debt?
If you file jointly, then yes you can. If your spouse does not pay their taxes and they pass away or you both go to file next year, they will need to be paid before you can file. If you file separately then you are not liable, it is considered to be separate debt. It may still need to come out of the estate though.
When a family member passes away, there is documentation that needs to be filled and sent off the CRA. They will then respond to you and let you know if anything needs to be paid or if they need any more information to finalize the process.
Marriage and Debt Responsibility
Even if you are married, creditors can’t come after you if it is their own debt, meaning that your name isn’t on any of your spouse's debt. They can only come after you if your name is on the debt, it would then be considered marital debt. That being said, if you own a home together or have any assets together they can still come after that. That is where it will affect you. If they are considering a consumer proposal or a bankruptcy it may or may not affect you.
When it comes to a consumer proposal, your spouse will not be affected. Even if the debts are joint, such as joint credit cards, this is the case. This is because it only affects the person who files for the consumer proposal. Your partner's credit rating and credit score won't be affected. Even so, it is best to speak with a licensed insolvency trustee. They can help you navigate any unpaid debt whether your personal debts, partners debts or marital debts will be included in the consumer proposal process and what the best next steps will be.
When it comes to your spouse filing bankruptcy, that won't affect your credit score. Their debts are their debts. The only time you may be affected is if you jointly own a home. There are some rules to that though. It depends on how much equity is in the home and on other factors. It is best to discuss all of the implications before filing for bankruptcy.
How it Works With a Spouse's Mortgage
Just like other debts, if the debt isn’t yours you aren’t responsible for paying for it. That being said, if the mortgage is only in your spouse's name, if it is defaulted on the home will be repossessed by the bank. It won’t affect your credit score and you won’t be legally responsible.
If your spouse passes away and the mortgage is only in their name, you aren’t legally liable. Even though this is the case, the estate will have to keep making the mortgage payments until the home is sold or the person who inherits the home begins to make payments. By then everything will be transferred into the new owner's name.
How the Separation of Debt Works in Each Province
In the event of separation or divorce, who pays what will vary depending on which province that you live in.
In BC, family debts are divided equally during a separation. Family debts are anything that was taken on during the relationship or after the relationship in order to maintain co-owned assets. This includes things like:
- Loans, lines of credit and credit cards
- Loans from family members
- Income tax
- Repair costs
In the event of a divorce or it goes to court, it can be decided that the debt is split differently in a way to make it fair.
Alberta works similarly to BC in that all family assets are divided equally in a marriage separation. When going through this process it is a good idea to get a separation agreement in order to protect yourself during this process.
In Saskatchewan, if the debt is considered to be family debt then it is to be split 50/50. If it is not family debt then it is up to the person’s who’s name it is in to pay it. If you own a home, the home is to be sold and pay for the family debt while splitting the remaining profits or one party is to buy the other out after the family debts have been paid.
In Manitoba, it is the same, a 50/50 split. That is unless it is deemed unequal such as one person makes more money than the other. If this is the case then a different agreement will be made. The cost of a separating agreement in Manitoba is anywhere between $500 and $2000.
In Ontario, there is something called net family property. How this works is you add up all of your individual and family debts. This is then divided and decided who will pay for what. That being said this is different from contract law where if your name is on the debt then you must pay it.
This is different from other provinces where the debt is just split 50/50. That is why it is important to cancel any joint accounts once the separation has taken place. Any debts taken after the separation has started are considered separate debts.
In Quebec, if you are married you have to legally file for separation. This isn’t the case if you are common law. In a marriage, once the separation has started a separation agreement will be made. This will add up all of the family debt and divide it. Any remaining debt is to be paid by the individual whose name it is in.
If you are common law then anything that is separate stays separate, and anything that is had together is to be either canceled, transferred or paid off.
Nova Scotia is very similar to Quebec. It is recommended to speak to a lawyer once a separation has happened to figure out who will be covering what.
In New Brunswick, the general rule of splitting family debt 50/50 applies unless another arrangement has been made.
Nunavut, Yukon & the Northwest Territories
The general 50/50 rule applies here as well for the amounts as of the date of separation. This includes the equity in the home.
How to Protect Yourself
If you are looking to protect yourself in the event of a dissolution of marriage, the best to do this is to have a marriage contract. As long as this contract is legally binding, in the event of a separation or divorce, the general provincial rules don’t apply. The parameters of the contract will be followed instead.
Many couples will choose to do this if one makes more than the other, or one has significantly more debt. If this is something you are considering, your best bet is to contact a lawyer that specializes in marriage contracts. You and your partner can discuss the specifics of the agreement and that way you have more control in the event that the relationship does end.
When it comes to the debt of your spouse, without a contract in place, it can cause some issues. In the event of a divorce, any debt that helped the marriage is considered to be family debt. In the event that you can’t come to an agreement yourself, then a lawyer would need to get involved. In some cases it may even go to court. In the event of your spouse’s death, the debt that isn’t in your name is then owed by the state. Because of probate, and other legalities that can hold up the process, it is a good idea to have a will and life insurance. This will speed up the process as well as cover any outstanding debts. Many times people also have insurance on their debt, so make sure you are aware of those details.