November 3, 2021

Divorce and Debts – what it means for you

You are getting a divorce. You have a house, a car, some savings, but also debt. Here's how debts in divorce impacts you.

When you married, you may have had few debts. Most people have few assets too. Perhaps you were one of those people who married right out of college such that you only had student loans and a beat up old car.

The picture can look vastly different at separation. Now there is often a house, a better car, maybe RRSPs or a pension. Then there is a mortgage, a car loan, and a line of credit for that new furniture you bought five years ago and still have not paid off.

Then the divorce interrupts. So, how are the debts dealt with?

Debts have to be sorted into two piles, the pile that belongs to one spouse and the pile that is joint. Often the mortgage is joint. Car loans are often to one spouse alone. Sometimes there are income tax debts, which are in the name of one spouse alone. The very first thing to assess is what debts there are. Get paper (or PDF) copies of the debts. That means gather the line of credit statement for your date of separation, as well as the mortgage.

A key point to understand is that debts in your name operate to shrink the assets that you share with your spouse.

Let’s take a look at Harry and Sally. They are divorcing after 20 years. They had no children and decided to sell their house. They divided the house money equally after they paid off their mortgage and their real estate agent. Now they need to sort out the assets and the debts.

An example of how it works assuming this is their date of separation picture and they both had nothing when they married:

Assets                           HARRY                               SALLY

Car                                   $50,000                                 $10,000

Savings                           $150,000                                $5,000

$ from house sale         $50,000                                 $50,000

sub-total                         $250,000                               $65,000

At this point, you think Harry has to write a big cheque to Sally as he has much more than she does.

Hold on. Here come the debts.

Subtract the debts as of their date of separation:

Line of credit                 $100,000                              $0

5 Credit cards                $50,000                                $0

Car loan                           $55,000                                $2,000

Now we take the sub-total of the assets and add up the debts for each of Harry and Sally:

All assets                          $250,000                            $65,000

– debts                            – $205,000                          –  $2,000

TOTALS                            $45,000                               $63,000

Harry’s debts have shrunk his overall assets such that he has less than Sally.

The law in Ontario says they have to balance their “net family property” (see our blog on The Other 50% Myth). This means after you add up their assets and subtract their debts that they have to balance between the two of them.

Here, they are not balanced. Harry has $18,000 less than Sally. Some may say he spends foolishly, and that can be an argument if his debts came from something like gambling. In this case it may be more along the lines of Harry borrowing money to invest. Perhaps he was the one who paid for all their trips down south for holidays.  That is not the real point – the point is to understand how debt impacts assets when you are divorcing.

In this example, to balance between them, it is Sally who will owe $9,000 to Harry. Then they both end up with $54,000.

They each then are responsible for paying their own debts and those details would go into a separation agreement.

Debts can become complicated. Sometimes debts are to family members of one spouse. Sometimes there is a disagreement about whether the money was really a loan instead of a gift (which then removes it as a debt). There can be debates about debts that have yet to happen. That is often the case over RRSPs which have a future tax to be applied to them. Coming up with that future tax can be a complicated discussion. The same thing can happen on valuing a capital gains tax on a cottage or on the sale of shares in a corporation.

This is where we can answer your questions. Just give us a call.

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