If there's debt, make sure you have a lawyer
In an earlier post, I explained why it is important to have a lawyer for a separation agreement even if the two parties have agreed on everything. It is even more important to have a lawyer represent you if either party has a lot of debt going into a separation. Here are a some scenarios where debt is an important factor to consider and how a lawyer can help protect your interests.
One spouse might rack up a lot of debt after the separation on a line of credit
If the separation has been difficult and spousal relations are frayed, then it may be very tempting for your ex to max out a line of credit to spite you (or because they have no other source of funds). As far as the lender is concerned, if the line of credit is in both names, then you are both liable for that increase and repayment of the debt. Even if it is just in one person's name, then the net value of the divisible matrimonial property has now been reduced. Good legal counsel, if hired before this happens, may be able to prevent this from happening by getting a court order that prohibits either party from dissipating matrimonial assets. Even if this has already happened, there may still be various options available to your lawyer to limit the damage done. For example, your lawyer could ask the court to divide the rest of the matrimonial property unequally in your favour in light of what has happened.
You are the spouse with the higher income and your ex is coming after you for spousal support
Who is carrying what debt from the relationship, and whether that debt was incurred before or after separation, can have a major impact on the level of spousal support that you may have to pay. Many people are servicing significant debts at the time of separation. Often the separation was preceded by efforts at fixing the relationship that required spending more money such as going on a vacation together. The court is supposed to take such debts into account but your ex may try to claim that those debts are solely your own, that they were incurred after the separation, or otherwise try to keep the court from considering them. A spousal support order made against you where you are paying a level of support based on the disparity in incomes, without adequately taking those debts into account, could be financially catastrophic for you. It may seem counter-intuitive to spend on legal counsel when you already have other debts but this is not the kind of spousal support hearing that you want to improvise on your own.
You or your ex have reached an agreement but it will be a while before you will receive the share of the property that you are owed
Imagine that you and your ex have reached a property division settlement stating that he will sell his house within the next six months and then you are supposed to get $100,000.00 from the sale proceeds. The two of you reached this agreement because your ex has a lot of debt and does not have the money to make that payment to you until he can sell the house. What if, after the agreement is signed and you think that everything is settled, your ex decides to declare bankruptcy? Most of the bankrupt's property would be owned by the trustee who would then liquidate that property and, depending on how much money that generates, pay out only a percentage of the full amount owed to the unsecured creditors (which would probably include you). Good legal counsel could mitigate this risk by drafting safeguards into the separation agreement. For example, the agreement might state that your ex holds that house in trust for you until that payment is made. The agreement could also state that spousal support would kick in at some higher level if the payment were not made on time. Bankruptcy does not discharge spousal support obligations. These examples are just a few of the ways that debts can make separation more financially hazardous and how having good legal counsel can help protect your interests.