How does Ontario law treat debts on Separation?

When you separate and are looking at divorce, you want to know how the law deals with both your assets and your debts.

Debts on divorce. How are they dealt with? The first point to be clear on is that the answer depends on whether you are common law or married. As we outlined in the last post, common law couples have different property rules than married couples.

For common law couples, the law suggests that only debts that are jointly held, like a mortgage where both parties are joint owners on the house and mortgage, or a joint line of credit or joint credit card should be divided between the parties. If your ex has a credit card under his or her name, and you have not signed up to be responsible for it, you are (in theory) off the hook, both against creditors coming after you, and in the family law system. We say in theory as there is a law in equity that says that if someone incurs a debt to benefit another person – say for example that you paid for a new deck with your line of credit, but the deck was installed at the house your common law spouse owns – then if you separate, it’s not appropriate that you are stuck with a debt and your ex gets a new deck and an improved value of his or her house for free.

For married couples, the Family Law Act outlines that married couples need to look at debts, whether they are held jointly or under one name alone, under the umbrella of Equalization. They are Equalized, but that does not mean you have to pay 1/2 the debt of your spouse (should he or she have a big line of credit in their own name). This means, if your spouse has a $30,000 line of credit at date of separation, and you carry zero debt, their debt still factors into how your overall property is split. You aren’t off the hook under the Ontario family law regime just because your name isn’t on the debt. The law requires you to add up all of your individual assets and debts to calculate something called Net Family Property. You have to calculate the increase in your net property from date of marriage to date of separation – something we explain in our blog “The other 50% myth”.

In both common law, and marriage, there can be arguments made to change these initial positions. For example, one spouse goes on a gambling spree and acquired huge debts during the marriage, the other spouse may argue that this debt is the sole responsibility of the spouse who incurred it, even if the spouse used marital assets (such as the family home) to secure the loan that paid for the spree. Similarly, a common law spouse who incurred debts that improved the financial circumstances of the other party may argue that it is unfair for them to bear the financial consequences of this debt alone.

Debts incurred after separation are typically viewed as the legal responsibility of the party that incurs it. In equalization, even though it’s the legal responsibility of one person for the debt, it gets equalized when you adjust all assets and debts between the two spouses.

It is important to note that legal responsibility under the Family Law Act does not always align with a person’s personal responsibility under contract law. If you have guaranteed a debt for your ex or if your spouse uses joint credit post-separation, and payments are not made, a lender is within their rights to pursue you in the event of default. This is why it is important to consider limiting access to joint debt and monitoring payments on any loans guaranteed by both parties to protect the credit rating and financial situation of both parties post-separation.