Finding out that your soon-to-be spouse has a lot of debt can be shocking, but it can also leave you wondering how that debt will affect your finances. Debt can have a lasting impact on the financial and emotional health of a married couple, so the more you know about your individual and joint debt obligations the better.
Here are answers to five common questions about how to deal with debt in your marriage.
There are so many ways someone can bring debt into a relationship: student loans, credit card debt, car loans, credit lines, and mortgages are all common. In the process of combining lives, it can be easy to overlook or put aside the practical decisions, like who is responsible for pre-marital debts or financial obligations.
For individual debt, only the spouse who signed for the debt is responsible for it. So, if you have student loans under your name only, your partner isn’t responsible for those payments unless they choose to be. Likewise, if your partner has a vehicle loan and credit card debt, you are not obligated to repay your partner’s debts.
Things are less clear cut when you need to decide how you and your spouse will manage your debts once you’re married or common law. Will you combine your incomes and your debts to make all financial decisions and payments together? Will you incur some joint debt, like a mortgage or line-of-credit, while maintaining your own student loans, credit cards, etc.? Or do you prefer to keep all your credit and debt separate? These decisions deserve serious time and attention.
Joint debt is when both you and your spouse sign a legal agreement to share responsibility for a debt. Once you’re married, there may be situations when a lender will ask both of you to sign a loan as co-borrowers. In other cases, one of you may be the borrower, while the other will need to co-sign and act as a guarantor. Whether you’re a co-borrower or a guarantor, you are still responsible for abiding by terms of the loan. If one of you falls behind or stops making payments altogether, the other will be liable for the entire loan.
If you choose to formally combine your pre-marital debts through something like a debt consolidation loan or line of credit, then you’ll be agreeing to joint responsibility for the consolidation terms. That means you must ensure you make payments, whether your partner continues to do the same or not.
There are also circumstances where you could be legally impacted by your partner’s individual debts as well. If your spouse falls behind or stops making payments on a personal debt, a lender could seek permission to put a lien on your home, or other jointly held assets.
Joint debt can impact your personal credit score. You must ensure payments are made or take over payments on your own if your spouse stops making payments to avoid a negative impact on your credit score. Your spouse’s individual loans, credit cards, etc. that you have not signed for will not affect your credit score. However, your spouse’s low credit score could impact your application for joint credit, such as a new car loan or a mortgage. The lender may not consider the joint loan a good risk, which could result in a the loan being offered at a higher interest rate or with stricter borrowing terms. Or your credit application might be declined entirely.
How should I protect myself and support my partner?
Make in a priority in your relationship to talk about money regularly. Most couples end up dealing with a mix of personal debts that precede the relationship, joint debts you take on together and individual debts you take on along the way. Finances become more complicated after marriage, so it’s important to understand each other spending habits and keep track of all your credit and debt details and obligations.
Sometimes, people overestimate the amount of household income they’ll have as a couple, so it’s a good idea to have a spending plan or budget so you’re both aware of what’s coming in and going out and how much wiggle room you have in your budget. You might not have the financial capacity to take on more payments, and when one of you takes on a new debt or spends above your budget, debt accumulates, leading to problems. Be aware of the warning signs of debt problems so you can deal with any issues early on.
At any point in your relationship, if your partner chooses to file a consumer proposal or bankruptcy to resolve their unsecured debts, they can often do so without affecting you. A Licensed Insolvency Trustee (LIT) will sit down with you and your partner to be sure you both understand the process, and can advise you on how to manage your finances to protect yourselves and your credit.
Sorting out finances if you separate or divorce can be time consuming, stressful and confusing. Begin by taking stock of all your personal and mutual assets and debts. You’ll need to list out all your marital assets and debts and make decisions about how to manage your shared accounts. If there are joint credit cards or you’re listed as a co-borrower or co-signer on a loan agreement you may be considered responsible for all or part of these debts.
Any accounts with both of your names attached should be closed (or one partner can keep the account and remove the other’s name). Cancel credit cards or lines of credit that you don’t intend to carry forward together.
While you’re deciding what to do about certain shared debts like a mortgage, you may choose to keep some joint accounts open. Make sure no additional debts are attached to that account if you aren’t responsible for them. Keep tabs on the joint account(s) and discuss any issues as soon as you notice them to avoid financial problems. If you aren’t sure how to separate certain accounts but keep others combined, it’s best to seek the advice of a financial advisor.
Managing your credit and debt will be a recurring theme in your relationship, and like everything else, it will likely shift and evolve as your relationship evolves. Your individual and joint preferences for how to manage debt might change, too. To avoid misunderstandings, conflicts or unexpected financial problems, make your financial relationship a priority and communicate regularly about debt management.
If you’re worried about your partner’s debt level or how your debt affects your spouse, meet with a Licensed Insolvency Trustee today to create a plan and review your debt relief options.
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