Date

September 29, 2021

9 things about divorce and debt

Debt difficulties can sometimes contribute to the breakdown of a marriage, but divorce will not necessarily solve a couple’s financial problems. Debt can quickly become an ongoing point of contention between spouses

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9 things about divorce and debt

Debt difficulties can sometimes contribute to the breakdown of a marriage, but divorce will not necessarily solve a couple’s financial problems. Debt can quickly become an ongoing point of contention between spouses who are separating, especially if there’s disagreement on how debt is split in the divorce. In this episode of the BDO Financial Wellness Podcast, BDO Licensed Insolvency Trustees Jasmin Brown and Paul Ihnatiuk cover 10 things you should know about divorce and debt. To learn more about our conversation with Jasmin and Paul, read the full transcript below.  - thumbnail

Debt difficulties can sometimes contribute to the breakdown of a marriage, but divorce will not necessarily solve a couple’s financial problems. Debt can quickly become an ongoing point of contention between spouses who are separating, especially if there’s disagreement on how debt is split in the divorce. In this episode of the BDO Financial Wellness Podcast, BDO Licensed Insolvency Trustees Jasmin Brown and Paul Ihnatiuk cover 10 things you should know about divorce and debt. To learn more about our conversation with Jasmin and Paul, read the full transcript below.

Financial Wellness Podcast Transcript  

Tera:

Hello, and welcome to the BDO Financial Wellness Podcast. I’m Tera Beljo. And in this episode, we’re going to be tackling the very difficult discussion surrounding debt and divorce. Financial difficulties can take a toll on a relationship. In fact, money problems are often cited as the leading cause of a marital breakdown. The end of a marriage, as traumatic as it can be, can be even more stressful when there are worries, confusion or disagreements about debt issues like credit card balances and outstanding loans. So, it’s understandable that couples often have questions or concerns about how to deal with their debt before, during or after a divorce.

My guests in this episode, are BDO Licensed Insolvency Trustees, Jasmin Brown and Paul Ihnatiuk. Jasmin and Paul have both helped individuals and couples who are going through relationship breakdowns, overcome their financial problems. I’m looking forward to the conversation with them because I know that there are so many myths surrounding debt and divorce. Things like who is responsible for what, single debt versus joint debt and which spouse can be pursued by creditors. Let’s jump right in.

Paul let’s start with a question that you probably hear often. What happens to debt, for example, credit card debt, car loans, line of credit when a couple separates or divorces?

1. It’s important to understand the difference between joint and individual debt.

Paul Ihnatiuk:

When you’re getting into a marriage, a marriage doesn’t automatically tie you to your partner’s debts or their credit as well. During a marriage, if you are going to have any joint debt, now joint debt is when two of you are on that credit facility. Meaning both of you are responsible. In order for both of you to be on that both of you actually have to sign the documentation at the start. It just doesn’t automatically happen when you say I do. One thing important to remember is when you’re leaving a marriage is very similar. If you have your own individual debts, if your partner wasn’t involved with your debts during your marriage, well, then when you leave that marriage, you are. They’re not going to be involved unless something ties you to that. Again, either you’ve signed a documentation or through the divorce proceedings, you have agreed to pay the other person’s debt.

2. If both spouses signed for the credit, both are fully responsible for the debt.

Tera:

What if the debt is under one spouse’s name, but the other spouse has spent the funds?

Paul Ihnatiuk:

Well, it really comes down to also the credit agreements, what you’ve agreed to. With the credit agreements, if the other spouse has been spending the funds, the financial institution really doesn’t care who signed the funds. They really care about who signed on a dotted line, who is obligated to pay those funds. So, you’ve defaulted on your Visa card and you say your spouse has been spending all the money. The financial institution really doesn’t care. They want you to pay the money and you’re going to have to pursue your spouse outside of the Visa card, for example. This is where a lot of divorces get very sticky as well. I have seen a lot of messy divorces where both spouses or ex-spouses are looking at each other saying you spent the money. I didn’t spend the money. It becomes a very complicated, long divorce in those situations.

3. Your lender is not obligated to follow your divorce agreement.

Tera:

Now I actually had a friend run into this problem. What if the divorce agreement said the individual debts would be shared in divorce, but that person didn’t even know about it? They didn’t co-sign on it. Are they obligated to sign that paperwork and say, yes, I’m going to pay that debt?

Paul Ihnatiuk:

Well, it depends on if it’s obligated if they’re going to be signing the paper. Of course, they are hopefully going to have some legal advice as they’re going through their divorce proceedings. However, it is ordered that both of them have to pay the debt. The one thing to remember about that is your financial institution is not party to your divorce. What that means is that they’re not involved in discussions, nor are they obligated to follow that divorce agreement because they have not been involved. So, despite you having a divorce agreement saying, my ex-spouse has to pay this, the bank is still going to pursue you and they’re not going to be pursuing your ex-spouse.

Tera:

What about secured debt then?

Paul Ihnatiuk:

Well secured debt, that’s a bit more complicated of a situation. Now, with secured debt a lot of times we do see this through marriages in particular. If there is a matrimonial home and you owned real estate, the financial institutions normally want the spouse to sign off and they also want them to consent to that agreement. So, yes, that is a little different because you are actually tied to that debt. Now, when would you have to pay if there’s any shortfall? Well, if one of the spouses stops paying that debt, then the bank, for example, is going to start a power sale or foreclosure proceedings against the property. Anyone who has signed on to that mortgage will be obligated to pay for any shortfall.

4. It’s important to protect your finances during a divorce.

Tera:

Okay. Now, Jasmin, how can a person protect themselves from debt during a divorce?

Remove your spouse as a secondary cardholder

Jasmin Brown:

It’s really important to look at what your name is actually on, like Paul has said. If you have a spouse that’s still attached to a credit card or some other credit facility, and you have concerns that they may continue to incur additional debt, you can work to have them removed from those cards. Remove your spouse as a secondary card holder so that they’re unable to continue to use the debt.

Freeze accounts if you can

You can also freeze certain accounts so that they’re only able to accept payment versus someone being able to incur additional debt or increase the balance. You do want to make sure. Like Paul has said, if your name is on it, the financial institution sees you as responsible.

Keep paying on joint debts (even if your spouse isn’t) to protect your credit

If you want to protect your own credit report, your own credit score, it’s important that you are making the payments, at least until you have some assurance that somebody is going to be paying it either because of a family law, a divorce or separation agreement, or for some reason. But you do want to make sure that the payments are being made so that your credit report is protected.

Refinance secured loans if it makes sense

For secured debts, if you are able, it may make sense to refinance those loans under one name and remove the other spouse completely. So probably whoever is keeping the asset will refinance them under their own name, provided that they can qualify on their own too.

5. Joint debt does not mean you only owe 50%.

Tera:

So also, joint. I want to just touch on this for one second, because I think this is a myth that comes up a lot with us. So joint does not mean that you’re responsible for 50 per cent of the amount, correct?

Jasmin Brown:

That’s right. If you’re joint, you’re basically jointly and severally liable. A financial institution is going to go where they can get paid. If they’re running dry on one spouse, but they’re collecting payment on another, they’re going to go for full payment from one until the balance is cleared and they have every right to do that. So joint does not mean that, okay, the bank will just split this 50-50, collect my share, and then equally go after my partner for the remainder. It doesn’t work like that. You can basically consider yourself 100 per cent responsible until that debt is paid in full.

6. An LIT can help you determine the best time to file a consumer proposal or bankruptcy.

Tera:

Thank you for clarifying that. Now, Paul, what are the pros and cons of filing a consumer proposal or a bankruptcy before or after a divorce?

Paul Ihnatiuk:

Well, it really comes down to looking at your entire debt situation. You need to examine a situation to see, okay, all right, is the spouse joint. Is it going to affect them? How is this going to proceed? Number one is you need to start looking after yourself when you’re going through the divorce. So, you need to look at your financial situation. I am moving ahead. I’m no longer in a joint situation with my spouse. It’s about me and where I am going to get down the road. So, it’s all about financial planning and you’re looking three to five years down the road. If you’re struggling right now, you need to take action right now and not be concerned about what your ex-spouse is doing.

Tera: 

When should you file a consumer proposal or a bankruptcy before divorce?

Paul Ihnatiuk:

Well, again, it depends on some situations in a divorce are pretty clear that everything has already been split up. Everything’s been divided, it’s fine to proceed. A lot of times people don’t know what’s going to be happening through a divorce situation. So if you don’t know how much you’re going to have to pay in support, if you don’t know how much you’re going to be obligated to pay, if you are going to be incurred with more legal fees moving forward, these all factor into whether you should go (file a consumer proposal or bankruptcy) before or after a divorce.

One of the best things (about) sitting down with a Licensed Insolvency Trustee is we’re going to explore all these options because everyone’s situation is unique. Everyone’s marriage was unique. Everyone’s divorce is going to be unique. So what we’ll do is we’ll do a financial plan and we’re going to talk about what the pros and cons are and what you should be looking for if you are going to be filing right now, or if you’re going to wait until your divorce finalizes as well.

The other thing you should be talking to is also, you have legal advice from your lawyer. If you have a lawyer that’s going through divorce proceedings, they’re going to be built to provide you with specific legal advice. A Licensed Insolvency Trustee can provide you with the options and what you can do right now, but a lawyer can actually tell you, hey, you need to pull the trigger right now, or you should wait until this divorce is finalized.

Jasmin Brown:

To add to that. A Licensed Insolvency Trustee can run some scenarios with you. If you’re unsure of what the support payments will be, they can go through and look at, okay, if this is your income, and this is your support payment, here’s what you’d be looking at. If your support payment is actually quite a bit higher or lower, they can run those scenarios with you to give you a fairly decent idea of what you’d be expected to pay in a bankruptcy or consumer proposal scenario. But it may make sense to wait until there’s some resolution to that. If you have the luxury of waiting. Sometimes the creditors are at the door and you have to act a little bit faster.

Paul Ihnatiuk: 

The other thing to remember is, in a bankruptcy your payments are going to depend on a number of factors. I hate to jump ahead if we’re going to be talking about this in this podcast, a little later on, but in bankruptcy, your payments are determined on what your monthly income is and what your monthly expenses are. Also, those expenses factor in support payments, and child support payments. So, in a bankruptcy while your payments might seem a little high right now, if you are obligated to pay support, it could lower those payments.

In a consumer proposal, it’s a little different because the creditors are looking at your situation right now. They’re not looking at what you’re going to be paying potentially one year down the road. Are you going to want to go into a consumer proposal right now with your payments set at a certain amount and there’re certain unknowns? So, this is why we run those scenarios with debtors and clients. We give them those options and we let them then pick and choose which option is best for them.

7. Your ex must make support payments, even if they file a consumer proposal or bankruptcy.

Tera:

Since we’re talking about alimony and child support, let’s talk about it right now. So, we’ll just move on to that. For example, what happens when an ex-spouse files a consumer proposal or bankruptcy, will they have to make their support payments, Jasmin?

Jasmin Brown:

Yes, they will still have to make their support payments, regardless of whether they’re in a proposal or a bankruptcy. It can affect their ability to make payments, if they have a support payment that is higher than anticipated, but they are still required to pay it. It is considered what’s called a non-discretionary expense when you have child or spousal support to pay. It does have an impact on a bankruptcy, but they are definitely still required to make the payments.

Paul Ihnatiuk:

I guess from a social standpoint, if you take a look at the whole purpose of support payments, it was to make sure that you’re going through this divorce situation that especially the children aren’t affected because of the divorce. A lot of times people look at support payments as this is a pain for me, that I have to pay this. Remember, a lot of times you have children on the other side. That is the key thing there, is you should be concerned about your children and concern that you want to be in a financial situation that you’re going to be able to provide for your children even if it’s through support payments.

Tera: 

Now, Paul, you brought this up already, but I just want to dive a little bit deeper into it. For the spouse who’s responsible for making support payments. How will these payments affect their consumer proposal or their bankruptcy? I use surplus income for example.

Paul Ihnatiuk:

Yes. Jasmin has just mentioned it’s a non-discretionary fund. So how it does affect in it, it really starts where we start running the scenarios. With a consumer proposal, we take a look at what surplus income is going to be. It’s not just in a bankruptcy situation because how creditors view consumer proposals is what are we going to get in this consumer proposal compared to a bankruptcy situation? That’s why we even do calculations of surplus incomes when we’re discussing consumer proposals. If you are making a support payment, it is actually going to lower your surplus income payments that you would make in a bankruptcy. You could see right there, it’s starting to affect what am I going to pay in my consumer proposal? What am I going to compare, pay in my bankruptcy? They basically both equally affect the consumer proposal and bankruptcy the same way.

8. Budgeting for your new normal can help if you’re struggling with post-divorce debt.

Tera:

Jasmin, divorce can sometimes add to financial struggles for each person. What advice do you have for a newly divorced person who’s struggling with growing debt load and affordability challenges?

Jasmin Brown:

I think those people really need to just go back to basics and it’s stuff that I know that we seem to preach about constantly about budget, budget, budget, but a budget is going to be your most powerful money management tool. It’s going back to making a list. What do you have coming in? You have potentially income from your employment. Are you receiving support payments from a spouse or an ex-spouse for child support or spousal support, Canada child benefit? Those types of things. You really want to look at everything that you have coming in, and then also what you have going out. Typically starting with fixed expenses. What are the things that are constant? They don’t change. Do you now have to pay for childcare? Those types of things.

Focusing on what you have going out, and then what’s left over and then taking a look at, do you have sufficient funds left over each month to reasonably cover your debt payments? If you don’t, then that’s when you need to reach out to a Licensed Insolvency Trustee to look at some options. But definitely go back to basics like budgeting, taking a detailed look at where you’re at. These types of things, marital breakdown, job loss, illness, those are big major life events that really shake up a person’s financial situation and they should be triggers to definitely go back and look at the budget, evaluate your new situation, your new normal and really see where you’re at.

Tera:

Another thing I want to circle back to is, I don’t know if it’s that we’ve started to focus more on mental health and people are more open about going to therapy and doing better and co-parenting has become,  like healthily co-parenting has become really important to a lot of people. I’m seeing this effect on how people are choosing to end their relationships. They seem to be ending more amicably now than they were say, 20, 30 years ago. I’m wondering, can ex-spouses who are amicable file a joint bankruptcy or joint proposal?

Paul Ihnatiuk:

Well, it depends already on, first of all, is the debt joint? And this is all part of financial planning. If substantially almost all your debt is joint, you could be looking at a consumer proposal. Just because you live apart, doesn’t mean your financial life is going to be changing. You are tied that way as well. It’s also important to remember in financial literacy and you’ve brought this up is that our children learn from what they see from their parents as well. That’s I think why we’re seeing a lot of divorces being more, I guess, amicable, that they want to have a good divorce to show their kids that in the future, you can get together in a relationship. You can split up. Things will be fine. You’ll still be friends. You’ll still look out for each other. You still look out for the children as well.

It also comes down to the financial life and I’ve heard this from my kids, some of their friends. I hear from the parents as well. When you know one spouse isn’t making a support payment, you hear this all the time at sports, especially. If one spouse is not making his support payments, but the kids pick up on this as well. Down the road they’re going to be learning that, hey, in the future, if I’m going through a divorce, I really don’t have to make those support payments, or they’re going to think, you know what? I have to make those support payments. Otherwise, we need to teach our children proper financial literacy and marriage and divorce is part of someone’s financial life and we should be showing our children that, hey, it’s an obstacle to overcome, but you can do it.

9. Ignoring debt during a divorce won’t make it go away – an LIT can explain your options.

Tera:

Now, as we close out. I want to know Jasmin, is there anything that you, any advice that you would like to give somebody who is facing a divorce and struggling financially?

Jasmin Brown:

I would say to try as best as you can, to set your emotions aside and to take proper steps to really look at your own situation and do what makes the most sense. Consulting with legal counsel on the actual separation divorce property settlement type matters would be recommended. Also, if there is debt that needs to be dealt with that you don’t ignore it because ignoring things does not make them go away. The more proactive you can be in dealing with things, the better. So, reach out, reach out. There are debt solutions available. A Licensed Insolvency Trustee goes through options. There is no cost. There is no obligation. It is meant to give you information and information is power. It equips you to make better decisions. Then like I said before, on your own, going back to basics, looking at the budget, figuring out what is the reality of your new normal. Do you need any help? If you need help, do not hesitate. Don’t let yourself become overwhelmed or stressed. Reach out, there are options available.

Tera:

That’s awesome advice. Paul, do you have anything to add?

Paul Ihnatiuk:

That is great advice. Jasmin’s got some great advice there. With financial literacy, one thing you have to remember is how long did you plan for that marriage? How long did you plan for that wedding? On the opposite side, there should be planning involved in a divorce, and we’re not saying planning, I’m getting out of here. There’s a lot of things that you have to plan for in a divorce situation. Where am I going to move? You know, where are the kids going to be? Where are they going to be most of the time? Where am I going to be banking? Well your debt should be included in that financial planning, in that divorce planning as well. Try to keep open lines of communications as well.

You’re doing this, you’re going through this. Hopefully things will be better in the future. Right now, it might be the most stressful thing you’re going through in your life, but things are going to get better in the future as well. Take the advice from an expert, call us. Call a Licensed Solvency Trustee. We’re here to listen. We’re not here to say you have to do this right now. We’re here to provide you with options. So, when you’re ready to proceed, you know what to do.

Tera: 

Thank you both. That was excellent advice. Thank you for the time. We’ll talk again soon.

Paul Ihnatiuk: 

Thank you.

Jasmin Brown: 

Thank you.

Tera:

I want to thank my guests on this episode about debt and divorce, Jasmin Brown and Paul Ihnatiuk. If you’re looking for more Financial Wellness podcasts, articles, debt management resources and tools, please visit our website debtsolutions.bdo.ca. Remember, we are here to help you turn the page on debt. Your next chapter is waiting.

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Date

September 29, 2021

9 things about divorce and debt

Debt difficulties can sometimes contribute to the breakdown of a marriage, but divorce will not necessarily solve a couple’s financial problems. Debt can quickly become an ongoing point of contention between spouses

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