As Licensed Insolvency Trustees it’s common for us to hear from people who are concerned about someone else’s debt problem, or how their own challenges with debt might impact someone else. We often address questions from children worried about their parents’ financial situation (and vice versa), friends inquiring for friends, bosses about employees – and most frequently, spouses concerned about the potential implications of their debt on their partner and family.
When you or your loved one is in debt, it can be difficult to seek professional debt advice or information about potential resources if you are feeling overwhelmed or embarrassed about your situation. Many people fear that their personal debts may turn into larger family financial issues if they are not able to pay off their debts, either as planned, or before they pass away.
What Canadians need to understand is that relationships alone do not create an automatic responsibility when it comes to repaying someone else’s debts. Read on to learn more about what can impact a person’s liability for someone else’s debts, and where you can get debt help in BC.
When is Your Spouse Responsible for Your Debt?
Getting married or having a common-law relationship does not mean that partners have assumed legal responsibility for each others’ debts – this is a very common myth. Unfortunately, many people misunderstand their legal obligations to creditors and consequently make financial decisions without understanding the facts of the situation that may result in a worse outcome than if they were fully aware of all of the rules surrounding debt in BC.
Relationships alone do not make you legally obligated to repay someone else’s debt, but a responsibility for debts may be triggered by:
- Specifically co-signing on or co-borrowing debts together; or,
- Debts being divided as part of a separation or divorce pursuant to BC’s Family Law Act.
What’s more, it’s important to understand that although your relationship alone does not create a debt obligation, a spouse or common-law partner can be impacted by certain actions of their partner’s creditors in the event their spouse is unable to meet their repayment commitments. One common example of this ‘bystander effect’ is where a couple holds a joint bank account at the same financial institution at which one owes a debt, and that creditor exercises their “right of offset” by withdrawing money they are owed from the joint account.
Coping with money issues in relationships can be incredibly challenging, and the stress is often compounded by a lack of awareness of your legal rights and remedies when it comes to debt. A Licensed Insolvency Trustee can help you understand your responsibilities when it comes to debts and can work with you on a plan that will allow you and your family to get a financial fresh start.
“[I] did not understand that I could have declared bankruptcy and settled my debt separate to my spouse while married and then only he would have remained in debt. I believed we both had to declare at the same time if we were married and shared the debt.”
– What were the reasons you waited to seek professional debt help? | 2020 BC Consumer Debt Study
Family Money Problems
Just as your spouse or common-law partner is not legally responsible to your creditors for paying your debts (unless they are a co-signer/co-borrower), neither are other family members responsible solely by virtue of being related to you.
Not having co-signed or joint debt with another person is the single best way to avoid transferring responsibility for debt and avoid someone else personally “inheriting” your debt. What many people do not realize until it’s too late is that the easiest thing you can do to give a creditor additional means to recover their debt is to co-sign or co-borrow debts with another party. We’re often asked when it may be a good decision to co-sign a debt for another person – our answer is ‘almost never’.
Co-Signed and Joint Debt
Proceed with extreme caution before you agree to co-sign or co-borrow with another person or business. Although your intentions may be good, and the intentions of your co-borrower are to make all of their payments as needed, life happens and unexpected events can create unanticipated financial challenges.
Co-signed/joint debts come in many forms, including loans, credit cards, leases, mortgages and more. By co-signing on a debt with someone (related or not) you become equally responsible for paying back 100% of the full balance due if the other person does not pay.
It’s important to note that:
- ‘Joint and several’ liability means each borrower in the loan or agreement is responsible for the entire unpaid balance, not half.
- Some borrowing agreements may even contain an ‘acceleration clause’ which allows the creditor to demand the full balance be paid immediately if a borrower breaks any part of the agreement, like missing payments.
- Credit card terms may vary depending on the lender. Always read applications and agreements carefully to be clear on what each cardholder is responsible for; do not assume secondary cardholders have a lesser responsibility for the total balance, regardless of who made the original purchases.
- Be especially cautious during the purchase or lease of a vehicle – many people simply do not realize the full commitment they are making on a joint obligation because their partner plans to be the primary insurer and driver.
Co-signed and joint debt often adds a stressful emotional layer in challenging financial situations. A Licensed Insolvency Trustee can help you resolve your debt issues and ultimately stop the ongoing negative effects that financial stress may be having on important relationships in your life.
Debts and Divorce
Although you are not undertaking a legal responsibility for repaying your spouse or common-law partner’s debts upon marriage or cohabitation it’s important to be aware that separation or divorce can trigger a division of ‘family debts’ in BC. BC’s Family Law Act defines family debt as financial obligations a spouse incurred:
- During the period when the spouses’ relationship began and ending when the spouses separate; and
- After the spouses separate, if incurred for maintaining family property.
Family debts may include mortgages, personal loans from individuals, overdrafts, lines of credit, credit cards, income tax debt and more. Upon separation, family debts are shared equally unless:
- You and your spouse have made a different agreement about dividing debt between you; or
- A judge orders a different division of family debts.
- This may be ordered in situations where an equal division may be “significantly unfair”.
Regardless of the outcome of your separation or divorce, the creditor who is owed the debt will still consider the person who signed for the debt responsible for repaying it and will seek payment as per the lending agreement/terms. Creditors can only collect on the debt from the borrower, even if the debt is “divorce divided”.
An insolvency proceeding such as a personal bankruptcy or legal consolidation with a Consumer Proposal can relieve a spouse of their obligation to repay their “divided portion” of family debt.
While filing bankruptcy or making a Consumer Proposal can consolidate virtually all types of debt, or even have most debts forgiven – there are two exceptions to this, pertinent to divorce-debts, where these debts would survive and remain payable:
- Outstanding child support balances; and,
- Outstanding spousal support balances.
In the event of a bankruptcy or Consumer Proposal, payment requirements for ongoing child support or spousal support would continue to be made as per usual throughout either a personal bankruptcy or Consumer Proposal process.
What Happens to Your Debt When You Die?
The death of a loved one does not transfer their debt to someone else personally. As outlined below in more detail:
- A co-borrower’s obligation for repaying joint or co-signed debts will remain, but if a person was not responsible for your debts when you were alive, they will not become responsible upon your death.
- If you have unpaid debt when you die, your creditor can try to make a claim on your estate, meaning that the proven debt may be paid from proceeds of your estate (if any).
“Since realizing that I was not legally responsible for debt solely in my late husband’s name, I would have paid my own debts first and been debt-free when he died. I would not have been happy to leave his debts unpaid, but I would have been under far less financial pressure.”
– Knowing what you know now, what is one action you would have done differently in managing your debt? | 2020 BC Consumer Debt Study
Will my Children Have to Pay my Debt When I Die?
Many people think that their children may become responsible for taking on their payments to creditors in the event they pass away. This is untrue – neither children (nor spouses or other family members) inherit a personal liability for paying your debt when you die.
Knowing is not owing! Managing your estate planning is best done with the help of a BC lawyer who specializes in wills and estate planning. If paying off debt is a priority for you, a Licensed Insolvency Trustee can work with you on a plan to successfully get you to debt-free at any stage of life.
Getting Professional Debt Help
It is important that each person has a clear understanding about their personal debt obligations. If you are worried about how to manage your debts, are unsure as to your responsibility for repaying a debt, or are struggling with debt-stress, the best thing to do is connect with a BC Licensed Insolvency Trustee.
A Licensed Insolvency Trustee will offer multiple options to protect you and your assets and can assist you and/or your spouse in paying off debts in a timely and affordable way, or alternatively having debts written-off and forgiven by creditors.
Risks of Self-Assessing Debt Solutions
Interpreting the laws around consumer debts can be complicated, and many people misunderstand their rights and responsibilities when it comes to dealing with debt. Unfortunately, some of the steps people often take in attempting to remedy a money problem can sometimes make the problem worse or create a new issue. Common examples of this include:
- Assuming responsibility for a debt for which there is in reality no personal legal obligation to repay
- Being pressured into making unnecessary payments or payment agreements by collection agents
- Incorrectly assuming certain debts cannot be legally consolidated or forgiven
- This commonly occurs where people are dealing with government debts like income taxes, student loans, etc.
- Engaging the services of high-cost or unlicensed debt help agents
- Both for-profit and non-profit credit counsellors may promote their services over other options as they receive money from creditors (a percentage of the debt they recover from your settlement).
- Depleting RRSPs in attempt to protect them from creditors
- BC residents are entitled to automatic protection on several different assets, including a comprehensive exemption allowance for RRSPs.
- Involving family members through transfers of assets, preferential payments or otherwise
- In addition to creating a shared debt obligation from co-signing, certain actions may unintentionally have consequences for family members who end up involved with your debts. For example, Canada Revenue Agency may issue “third party assessments” against property recipients in certain situations, to collect on a debt owed by another individual.
Licensed Insolvency Trustees are the only debt help professionals fully endorsed and qualified by the federal and provincial government and can help you to:
- Understand your specific situation, mapping out your needs and goals
- Assess all options available to deal with your debts
- Consolidate virtually all types of debt, including government debts, without borrowing, interest or added fees
- Have debt cut down to an affordable amount with lowered monthly payments
- Stop creditors from taking action against you for payment
- Get all your debt fully forgiven
Anyone can access debt resources via a Licensed Insolvency Trustee confidentially to discuss their personal situation and get advice. You are under no obligation to commit to any formal debt management proceeding and there is no cost to connect and get assistance.
Impact to Your Spouse of Bankruptcy or Consumer Proposal
Many people considering a formal debt management solution such as a personal bankruptcy or Consumer Proposal worry about a potential impact to their spouse or family. The good news is that not only can you take steps to legally deal with your debt independently of your spouse, but your decision to claim bankruptcy or make a Consumer Proposal does not transfer responsibility of those debts to your spouse either.
- If your spouse is not a co-signer/joint borrower on your debts, then they will not be impacted by your bankruptcy or Consumer Proposal.
- Your spouse does not become responsible for completing any duties or payments agreed to under your personal bankruptcy or Consumer Proposal.
- In some cases, a person’s spouse or partner may not even be aware that the filing is happening.
Even though your spouse may not have a legal responsibility for your debt, sharing a household often means financial stress is felt by everyone. We know that struggling with debt can bring a lot of shame and guilt. Sands & Associates is here to help you and your family get back on track – no judgment, just solutions.
Solutions to Deal with Joint Debts
Being in a position where you hold joint debts with your spouse, child, parent or other party, and one or both of you are having difficulty maintaining payments can feel overwhelming. Fortunately, there are options that can help address joint debts such as non-borrowing consolidation with a Consumer Proposal or declaring bankruptcy.
No two situations are exactly alike, and it is important to evaluate all potential options that can address both individual debts and joint debts that may be involved.
- If spouses (or other close parties) have a substantial amount of debts in common, it may be advantageous to file a joint Consumer Proposal together to manage both parties’ debts. This would allow all debts of both partners (joint and otherwise) to be consolidated into a single, reduced monthly payment with no added interest or additional fees.
- There is no legal requirement for both parties (even spouses) to undertake the same debt management solution.
- For example, one spouse might file for personal bankruptcy to have all their debts forgiven, while their spouse repays the joint debt. Or one spouse may make a Consumer Proposal to consolidate and cut their debt payments while the other spouse chooses bankruptcy relief.
- Should few (or no debts) be held together then separate solutions to address individual debt problems may be more appropriate.
A Licensed Insolvency Trustee can help you understand all your options to manage debts so you can choose the best way forward for you and your family.
Non-judgmental support, and solutions that can offer you a financial fresh start. You deserve to live with dignity, and without debt and its overwhelming stress. Book your free confidential debt consultation with Sands & Associates today.
This content is not intended to be specific legal advice; it is intended to be a simple guide in layman’s language to provide a basic overview only. E. Sands & Associates Inc accepts no responsibility for its use other than as intended. The law is an ever-changing body of statutes and decisions, and the reader is advised to seek legal counsel for specific matters relating to their situation.