Quite often people become liable for spousal debts, deliberately and ironically at the same time inadvertently. Sometimes, a spouse may help their partner re-establish credit by co-signing for them on a loan of credit card. At other times the spouses may feel that they can trust each other and should be able to manage the debts as a family. All is well while the relationship remains intact and/or payments continue to be made.
Since almost 50% of Canadian marriages end in divorce, and possibly more in separation, things can go pear shaped quickly. When you co-sign with your spouse there are three parties involved, you, your spouse and the creditor (lender). Initially you and your spouse will sign a contractual agreement with the lender indicating that you will be jointly and severally (both of you and each of you) liable for the debt. That’s a fancy way of the lender saying, “I don’t care who’s pockets I pick as long as I get paid”.
Having a co-signer, or surety, for the debt allows the lender to sleep at night with the comfort of knowing that if something were to happen to one of the spouse’s, the other would be legally obliged to step up to the plate and continue making the payments. Spousal debts frequently include mortgage debts, especially when ownership of the matrimonial home is in a joint tenancy (both names).
After the marriage breaks down (that sounds pessimistic but statistically seems to be likely) the law requires spouses divide their matrimonial property after arranging for their debt obligations to be similarly severed. This process is called “property equalization” it involves making calculations of liabilities as well as the values of property of the marriage and ensuring each party has an equitable split. Basically, and you should consult a lawyer better versed than I for clarity, property acquired during the marriage, with some exceptions, is divisible between the spouses and so are the debts again with a few exceptions – some property bought into the marriage may not be subject to division.
It would be highly unusual for both partners to remain in the home, although one of them often will. If there is equity, the spouse staying in the house may be required to pay some settlement amount to the other spouse in consideration for their share of equity. Nonetheless, both spouses may remain on the mortgage, even if not the title of the property.
In many cases, family lawyers draft indemnity agreements between
the spouses, wherein one spouse undertakes to ensure the other spouse’s debts
are paid in accordance with an agreed split.
Again, those agreements work well provided each spouse has the means to
live up to their end of the bargain and maintain the requisite payments.
However, it’s not always sunny days, one spouse may encounter other financial challenges resulting from the relationship breakdown. Perhaps a new spouse with a larger family will come along or there might be a change in employment causing a reduction in income. Such issues may make it impossible to maintain the terms of the secondary, matrimonial, contract leaving the other spouse (as the co-signer) to foot the bill.
The spouse, paying the other’s share, would then be able to sue based on the indemnification provided for in the separation agreement. But if the delinquent spouse files a bankruptcy or makes a proposal all bets are off. The paying spouse will still be required to pay the creditors and will only be able to file a claim in the proposal or bankruptcy based on indemnified amounts they have paid as at the date and time of the proposal or bankruptcy being filed.
Although the indemnifying spouse entered into a contract that was effectively breached by the filing of the insolvency proceeding, the contract became a nullity upon the filing of that proceeding and the claim of the remaining spouse was reduced to a financial claim for the amount s/he has paid. After all that spouse is still responsible to the creditor for the remaining amount of the debt.
If you’re feeling a little lost in the technicality or jargon of this article, please call the office for clarification at 519-646-2222