Guest Post - Gareth Slocombe, CIRP, CPA-CA, Trustee
With household debt said to be at record levels in Canada, financial stress frequently accompanies separation and divorce. In the interest of providing you with some timely information on debt and options for taking control of your financial future, we are delighted to welcome the input of Gareth Slocombe, CIRP, CPA-CA, Trustee*. Gareth will be guest posting on topics related to financial security and debt resolution. The first topic up for discussion is the slippery slope of credit card debt.
Who's responsible for credit card debt on separation?
The first issue to consider is which spouse is legally responsible to the credit card company for the balance on the card, leaving aside any consideration of a separation.
- The spouse who signed the credit card agreement is fully responsible for the credit card debt on that card.
- If one spouse signed for the card but a secondary card was issued in the name of the other spouse, then the other spouse is responsible for the debt from both cards as soon as that secondary card is activated and used.
- If both spouses signed for the card, this is considered a joint credit card and both spouses are legally responsible to the credit card company.
It is important to remember that the debt obligation to the credit card company by either one or both spouses does not change due to the separation of the spouses. What does change is how, and to what extent, the spouses become responsible to compensate each other for the outstanding credit card debts existing at the date of separation. It is worth bearing in mind that there is a legal test as to what constitutes separation, and you can be "separated" even if you are living together. Your lawyer will be able to advise you as to what date the courts would treat you as "separated."
How credit card debt is shared at separation
The next thing to consider is how responsibility for the credit card debts is shared at separation. For couples in BC, family debts and assets are dealt with under the Family Law Act which came into force in 2013. The Family Law Act deems you to be spouses upon marriage or after living in a marriage like relationship for a period of two years (or less than two years if you have a child together). The general rule is that all debts and assets acquired between the date that you begin cohabiting with your spouse and up to the date of separation are to be divided equally between the spouses. A simple example is two separating spouses with combined credit card debt of $70,000 broken down as follows:
Solely husband's cards $40,000
Solely wife's cards $20,000
Joint cards $10,000
Pursuant to the Family Law Act, at the date of separation, the credit card debt of $70,000 is split 50/50. However, because the husband is legally responsible to the credit card company for his $40,000 plus $10,000 for the joint cards, there needs to be an equalization payment between the spouses to even things up to $35,000 each.
Equalization of credit card debts
There are a number of ways for the equalization to occur, including:
- The wife could assume full responsibility for the joint card and also pay $5,000 to the husband
- Some or all of the cards could be paid off with funds generated from the sale of joint assets.
While this may appear fairly straight forward, issues can arise when there is no available property to be used to pay off the debts and one or both of the spouses are having trouble making payments. For example, if the wife is unable to either pay off the joint card or to make the equalization payment, that still leaves the husband responsible for the full $50,000 in credit card debt ($40,000 plus $10,000).
Credit card companies are not bound by separation agreement
The important thing to remember is that the credit card company is not bound by the separation agreement. They will still look to recover the full amount of the debt from whomever is named on the card.
What can you do to protect yourself from accumulating further credit card debt?
If you are involved in a separation or expect that you will be shortly, it is clearly a good idea to ensure that you are at least no longer responsible for charges incurred on joint credit cards. Even though the separation will trigger a split of debts between you and your spouse, you don't want to be held responsible for continuing charges by your ex-spouse on joint cards. You should contact the credit card company to cancel your card on the joint account and obtain confirmation that you are no longer responsible for any further charges.
Preparing for financial life after separation
Aside from settling issues regarding joint cards, you may want to consider some basic steps to take control of your finances now that you are no longer part of a relationship. As a separating couple, you may be going from a household with possibly two incomes and one set of household expenses to each spouse now having a single income combined with a full set of household expenses. Here are some things to consider to help make the transition smoother:
- Prepare a budget. Perhaps only one spouse handled all the finances while in the relationship. Given the added financial burden on separation, it is very important to get your monthly finances in order. Breakups can also be very emotionally taxing, and this often leads to overspending or a loss of focus on finances
- Cancel existing credit cards and get a prepaid credit card. Regardless of your credit rating, it is always possible today to get a prepaid credit card that is necessary for so many of today's financial transactions.
- Consider cohabiting with your ex. As odd as this may sound, this may be a much more financially viable alternative than physically separating assuming your separation was not too acrimonious. In fact, the Family Law Act specifically provides for situations where spouses have legally separated but continue to reside together. If you are thinking about going this route, you should get legal advice from a family law lawyer on how to set this up so that there is no confusion about separation dates that may affect your legal rights and obligations.
What do you do if you and your soon to be Ex are carrying a significant balance at the time of separation?
Assuming that the debts are becoming unmanageable for one or both of you and can't be reduced from the liquidation of family property, then it is important to address the situation from the perspective of doing what is mutually beneficial for both of you going forward. Issues to consider include:
- Letting your ex-spouse, who is responsible for joint debt, drift into insolvency is not in your interest because you are still liable for that debt regardless of any separation agreement. Whether you like it or not, you may be in a situation of mutually assured financial destruction.
- Reducing or eliminating the debt can put you or your ex-spouse in a better position to possibly pay or maintain support payments.
- Contacting a Licensed Insolvency Trustee to discuss options for reducing or eliminating the debts will give you a better picture of what is, and what is not, possible. This can be done either separately or jointly under a consumer proposal or possibly a bankruptcy filing if a proposal is not viable.
If you have a family lawyer acting for you, discuss whether getting in touch with a Licensed Insolvency Trustee may be helpful. In collaborative divorce situations getting help from financial experts experienced with resolving debt situations may be one way that you and your ex can find a creative solution to making separation less financially painful. *Gareth Slocombe is a member of the Canadian Association of Insolvency and Restructuring Professionals. He is a Licensed Insolvency Trustee and a Chartered Professional Accountant. You can learn more about Gareth and the services he provides by visiting his website at debthelpbc.ca.