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How Are Debts Divided in a Divorce in Alberta?
Family Law
How Are Debts Divided in a Divorce in Alberta?
10 min read
How Are Debts Divided in a Divorce in Alberta?
Introduction
When couples separate, much of the attention is usually focused on what they own.
Who keeps the house? What happens to the RRSPs? How is a pension divided? What happens to a family business?
But property division also has another side:
What happens to the debts?
For many Alberta families, debts can be substantial. A couple may have a mortgage, home equity line of credit, vehicle loans, credit cards, personal lines of credit, tax liabilities or business-related debts.
One of the most common misconceptions is that a debt automatically belongs to whichever spouse's name appears on the account.
That is not always the case when determining property rights between spouses.
At the same time, a separation agreement or court order between spouses does not necessarily change the rights of the bank or other creditor that originally lent the money.
Understanding those two issues is essential when dividing debts after separation.
Are Debts Divided in an Alberta Divorce?
Debts and liabilities can be relevant when determining the spouses' overall family property position.
Alberta's Family Property Act governs the distribution of property between spouses and adult interdependent partners who fall within the legislation. The Court considers the spouses' property as well as relevant debts and liabilities when determining an appropriate distribution.
This means that property division is not simply a matter of adding up everything the spouses own.
Their liabilities also need to be identified.
For example, a couple might have:
a home worth $800,000;
a $400,000 mortgage;
$100,000 in investments;
$40,000 in vehicle financing; and
$30,000 in credit card and line-of-credit debt.
Looking only at the $900,000 in assets would give a very misleading picture of the family's actual financial position.
Are All Debts Automatically Divided 50/50?
Not necessarily.
Just as every asset is not physically divided in half, every individual debt does not necessarily have to be split equally between the spouses.
The circumstances surrounding the debt can matter.
Questions may include:
When was the debt incurred?
Why was it incurred?
Who benefited from the borrowed money?
Was it used for the family?
Was it connected to an asset?
Was the debt incurred before or after separation?
Did one spouse incur it without the other's knowledge?
What happened to the money that was borrowed?
The overall property settlement also matters.
One spouse might assume responsibility for a particular debt while receiving an asset associated with it.
The objective is to consider the entire financial picture rather than simply dividing every account down the middle.
Does It Matter Whose Name the Debt Is In?
Yes, but there are two separate questions.
The first is:
Who is legally responsible to the lender?
The second is:
How should the debt be treated between the spouses when their family property is divided?
Those questions do not always have the same answer.
Suppose a $30,000 line of credit is registered only in the husband's name, but the money was used during the marriage for home renovations and family expenses.
The husband may be the person contractually responsible to the bank.
However, the fact that the account is in his name does not necessarily mean the debt will simply be ignored when the spouses calculate their family property claims.
The opposite situation can also occur.
A debt may be jointly registered, making both spouses responsible to the lender, even if their separation agreement provides that one spouse will ultimately be responsible for paying it.
Can a Separation Agreement Remove My Name From a Joint Debt?
Usually not by itself.
This is an extremely important point.
Suppose both spouses signed a joint line of credit with their bank.
Their separation agreement later states:
"The husband will be solely responsible for the line of credit."
That provision can create obligations between the spouses, but it does not necessarily release the wife from the loan agreement she previously signed with the bank.
The lender was not necessarily a party to the spouses' separation agreement.
If the husband later stops making payments, the bank may still have contractual rights against the wife if she remains a borrower or guarantor.
The same issue frequently arises with mortgages.
If one spouse is keeping the family home, the parties should determine whether that spouse can refinance the mortgage and obtain the lender's approval to remove the other spouse from the debt.
Do not assume that transferring title to a house automatically removes someone from the mortgage.
What Happens to the Mortgage?
The mortgage is usually considered together with the family home.
Suppose a Calgary home is worth $750,000 and has a $350,000 mortgage.
The gross value of the house is $750,000, but there is approximately $400,000 of equity before considering other adjustments and potential transaction costs.
If the house is sold, the mortgage will generally be paid from the sale proceeds before the remaining net proceeds are available to the spouses.
If one spouse keeps the home, that spouse may need to refinance the mortgage into their own name and address the other spouse's interest in the equity.
The ability to qualify for financing can therefore have a major impact on whether a proposed buyout is actually possible.
What About Credit Card Debt?
Credit card debt can be more complicated than people expect.
Consider a couple who had a credit card with a $20,000 balance when they separated.
The statements show that the card was used for:
groceries;
children's expenses;
household repairs;
family travel; and
ordinary living expenses.
That situation may be viewed very differently from a spouse secretly accumulating $20,000 of debt after separation for expenses unrelated to the family.
The name on the credit card is relevant to the creditor's rights, but when resolving property division, lawyers may also need to examine when the debt arose and what the money was used for.
What About Debts Incurred After Separation?
The date of separation can become particularly important.
Once spouses separate, their financial lives often begin moving in different directions.
One spouse might continue paying the mortgage and household expenses.
The other might borrow money to furnish a new residence.
Someone might use a line of credit to pay legal fees or ordinary living expenses.
Another spouse might accumulate significant credit card debt for entirely personal purposes.
Post-separation debts should therefore be carefully documented rather than automatically assumed to be shared.
Keep statements showing balances around the date of separation and records of significant borrowing afterward.
Without those records, it can become difficult months or years later to determine when a particular debt actually arose.
What If My Spouse Runs Up Debt After We Separate?
This can be a serious concern.
Suppose a joint line of credit has a balance of $10,000 when the spouses separate.
Six months later, the balance is $60,000.
The additional $50,000 cannot simply be ignored.
The spouses may need to determine:
who made the withdrawals;
when the money was borrowed;
what the money was used for;
whether the other spouse agreed to the borrowing; and
whether any of the money was used to preserve family property or meet family obligations.
Joint credit facilities deserve particular attention immediately after separation because both spouses may remain exposed to the lender.
Obtaining legal and financial advice early can help determine what steps should be taken to protect against further borrowing.
What If My Spouse Had Debt Before We Married?
Pre-relationship debts can also affect the property analysis.
For example, one spouse may have entered the relationship with:
student loans;
a personal line of credit;
credit card debt;
a vehicle loan; or
business debt.
A debt that clearly existed before the relationship may be treated differently from debt accumulated during the relationship.
However, the analysis can become more complicated if the debt changed significantly during the marriage.
For example, family money may have been used to pay down one spouse's pre-existing debt, or an old line of credit may have been paid off and then reused for family purposes.
Historical statements can therefore be important.
What About Tax Debt?
Tax liabilities should not be overlooked.
A spouse may owe money to the Canada Revenue Agency for personal income taxes, reassessments or other tax obligations.
A business owner may have additional tax issues involving a corporation, GST/HST, payroll remittances or shareholder transactions.
Tax debts can be particularly important because the amount owing may change as returns are filed or reassessed.
If there are significant outstanding tax issues, obtaining advice from an accountant or tax professional may be necessary before finalizing the property settlement.
What About Business Debt?
Business owners often have another layer of liabilities to consider.
A corporation may have:
operating lines of credit;
equipment financing;
commercial mortgages;
credit cards;
accounts payable;
tax liabilities; and
loans from shareholders.
The corporation's debts are not automatically identical to the shareholder's personal debts.
A corporation is generally a separate legal entity.
However, corporate liabilities can affect the value of the business, and a spouse may also have personally guaranteed corporate borrowing.
For example, a corporation may owe the bank $500,000 while both spouses have personally guaranteed the loan.
That situation requires careful review.
Business debts, personal debts and guarantees should be clearly distinguished when valuing a company and resolving family property.
What About a Home Equity Line of Credit?
A home equity line of credit, or HELOC, deserves particular attention because it may be secured against the family home.
Suppose the spouses have a house worth $900,000 with:
a $400,000 mortgage; and
a $100,000 secured line of credit.
They do not necessarily have $500,000 of available equity simply because the mortgage itself is only $400,000.
The secured line of credit must also be considered.
If the HELOC remains available after separation, the spouses should also determine whether additional borrowing can occur and who has access to the account.
Should We Pay Off All the Debts Before Dividing Property?
Sometimes paying off joint debts can simplify a settlement, but it is not always possible or appropriate.
For example, spouses selling their family home might agree that certain joint liabilities will be paid from the sale proceeds before the remaining money is divided.
In another case, one spouse may assume a vehicle loan because they are keeping the vehicle.
The appropriate approach depends on:
available cash;
interest rates;
tax consequences;
the assets being retained;
refinancing options; and
each spouse's ability to qualify for credit independently.
A settlement should clearly identify who is responsible for each significant liability and what must happen to joint accounts.
Why a Credit Report Can Be Helpful
After a long relationship, people do not always remember every account on which their name appears.
Obtaining a current credit report can help identify:
credit cards;
loans;
lines of credit;
mortgages; and
other reported credit obligations.
Both spouses should still provide complete financial disclosure, but a credit report can be a useful additional tool for understanding personal liabilities.
It can also help identify joint accounts that should be addressed after separation.
Don't Divide the Assets Without Looking at the Debts
A property settlement can look fair until the associated liabilities are considered.
For example:
Spouse A receives:
an investment account worth $200,000.
Spouse B receives:
a property worth $500,000.
At first glance, Spouse B appears to be receiving substantially more.
But what if the property has a $300,000 mortgage?
The spouses may each effectively be receiving assets with approximately $200,000 in net value before considering other factors.
This is why family property should generally be analyzed on a net basis, with both assets and relevant liabilities identified.
How Bridgestone Law Can Help
Debt division can become one of the most stressful parts of separation, particularly when the spouses have joint mortgages, lines of credit, tax liabilities or business debts.
At Bridgestone Law, our Calgary family lawyers can help identify the debts that need to be disclosed, determine how those liabilities may affect the family property calculation and negotiate responsibility for debts as part of an overall settlement.
We can also help address practical issues such as refinancing the family home, closing or restructuring joint accounts, dealing with secured debts and ensuring that the separation agreement clearly sets out each spouse's obligations.
Where complicated tax or corporate liabilities are involved, we can work with accountants and other financial professionals to understand the true financial position.
Most importantly, remember that an agreement between spouses does not necessarily change a lender's contractual rights.
Before agreeing to assume a debt, transfer an asset or leave your name on a joint loan, it is important to understand both your family law obligations and your continuing obligations to the creditor.
If you are separating or divorcing in Alberta and are concerned about mortgages, credit cards, lines of credit or other family debts, contact Bridgestone Law to speak with a Calgary family lawyer about protecting your financial interests.
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