Advantages and disadvantages of a joint application

When you apply for a joint debt or loan as a couple, you are saying to the lender: we would like to use our combined credit capacity, and our combined income, to support our loan application.

There are advantages to applying together for a debt consolidation loan.

• If one spouse’s debt-to-income ratio is too high, you can use the income of the second spouse to improve this lending factor.
• Similarly, if one partner has a bad credit score, the application may be approved on the merits of the second co-applicant or cosigning spouse.
• By improving the quality of your application and overall creditworthiness, you may qualify for a lower interest rate loan than the high debt spouse can acquire.

While you can borrow more money with a shared application, the downside is that as co-borrowers, you both will be legally obligated to repay the loan.

A joint debt creates what is known as a ‘joint and several’ liability. Both parties are 100% liable to repay all the debt. This can create significant financial risk for the spouse that is now assuming responsibility for debts created by the other spouse.

Credit score issues

Lenders are in the risk management business. To qualify for a low rate consolidation loan, at least one applicant will need a good credit score. You are relying on the positive credit history of one spouse to override the negative history of the other.  However, making a joint application means that the debts that were affecting your spouse’s credit score will now impact yours. 

• Your credit score may fall because you have taken on new credit.
• Multiple applications create hard hits on your credit report that can also hurt your credit score.
• A new loan can also increase your credit utilization ratio until you begin to pay down the consolidation loan.

Marital breakdown

Joint debt means you are responsible and liable under the terms of a signed loan agreement. It doesn’t matter who says they will pay the loan. If you divorce or separate from your spouse, and they stop making payments, the lender will look to you to repay the debt.

Debt cannot be allocated in a divorce or separation agreement. While your separation agreement might call for a 50-50 split of debts, or your spouse might agree he will make the monthly payment because the debt was his originally, the agreement between the two of you has no legal impact on your lender.

Further, it is not possible to have a name taken off a joint loan without the lender’s permission, and because the lender approved the loan based on a joint application, they may not be willing to do so. In the event of a marital breakdown, you could be left with payments you can’t afford.

Marital assets and property

Another factor to consider is whether you want to risk any family assets to consolidate unsecured debt like credit card debt.

Converting unsecured debt into a secured consolidation loan is one of the riskiest consolidation strategies we see.

If you are fortunate enough to own a home, a home equity loan, or home equity line of credit can seem like an attractive loan consolidation approach to deal with one spouse’s problem debt. However, merging family debt into your mortgage creates two financial risks; you are now liable for larger mortgage payments and, if you and your spouse default, you risk losing your home.

Income stability

One of the most common reasons people find themselves unexpectedly filing a bankruptcy or consumer proposal is a job loss or income reduction. Consolidating debts with your spouse means you are both equally responsible. If one spouse loses their job, you may no longer have the income capacity to keep up with your consolidation loan payments. The option for one spouse to file bankruptcy to deal with their separate debt, leaving the other financially stable, is off the table once you agree to consolidate your debt legally.

Student debt

With student loan debt is a growing issue among millennials, many are entering their marriage years already in debt. Today 1 in 5 of our clients carry student loan debt, and this rate is growing rapidly. If one spouse has been unable to earn enough to repay their student loans, it may make more sense for them to consider student loan relief options rather than burdening the two of you with ongoing loan repayment.

Student loan consolidation is also not always a good idea as you can lose the tax benefits of the deductibility of interest on Canada student loans.

Is a joint loan the best option?

Problem debt is problem debt. It may not make sense to shift bad debt to your partner. This may not help either of you get out of debt.

The reason most couples consider a joint consolidation loan is to use the good credit history of one spouse to help the other deal with overwhelming debt. However, if one spouse is experiencing financial hardship because of their loan payments, burdening the second spouse with the same joint legal obligation may not be the best course of action.

Before consolidating one spouse’s bad debts into a family debt, it may make more sense for the spouse with debt issues to talk with a Licensed Insolvency Trustee about loan forgiveness. The spouse with high consumer debt may want to consider filing a bankruptcy or consumer proposal as a form of debt relief rather than transfer the debt obligation to the other.

There is a secondary benefit in keeping personal responsibility for personal debts. This can preserve the credit rating and credit capacity of the spouse with good credit for future needs. That spouse can still qualify for a mortgage while both spouses save money for a down-payment after completing a consumer proposal, for example.

Filing insolvency does not affect your spouse’s credit. This is one of the common misconceptions of how a bankruptcy filing impacts a spouse. The spouse filing insolvency can work to improve their credit without harming the credit of their partner.

In the end, you must decide as a couple about consolidating your debt through a joint loan. Talk together about how and who will make the monthly payments, what happens if your finances or relationship changes, and how refinancing with a joint consolidation loan will affect your future financial goals.

The post Should Married Couples Get a Joint Consolidation Loan? appeared first on Hoyes, Michalos & Associates Inc..

What does cosigned mean?

When you co-sign a loan, both you and the borrower sign the loan agreement. As cosigner, you agree to repay the loan if the borrower can’t.

Joint liability does not arise because of your relationship with a person. You don’t automatically become liable for someone’s debts just because you get married or because someone dies. The only way to become jointly responsible for a debt is to cosign or guarantee a loan in writing.

If you’ve cosigned a loan, you are jointly & severally liable for the full amount of the debt. What this means for the cosigner when someone files a consumer proposal is that, while part of the debt is being paid via the proposal, the joint party is still responsible for the remainder of the debt.

Many people ask if they can “exclude” a joint debt from a consumer proposal so that the other cosigner is not stuck with the debt. Unfortunately, that is not an option within the laws regarding consumer proposals. In a proposal, all unsecured creditors must be treated equally even if there are joint debts.

How to deal with cosigned debt in different scenarios

So how should you proceed if you have joint or co-signed debts and are considering filing a consumer proposal? We look at some common situations.

What if a couple has large debts, both individual debts and joint debts?

If both spouses have debts they can’t pay, some in each name individually as well as significant joint debt, they can file a joint consumer proposal. Making one combined proposal to all their creditors is both easier, often less costly, than filing separately.

What if one spouse does not have much debt other than the joint debt?

If the cosigning spouse does not have a debt problem of their own, then the borrower can file a consumer proposal to eliminate their obligation to pay debts they owe, leaving the spouse to repay the portion of the cosigned debt forgiven in the proposal. This is a good way to leave one spouse with a good credit rating while working to eliminate overwhelming debts of the other spouse.

What if a couple separates or divorces when joint debts are still outstanding?

I’m often told that one spouse agreed to “take the joint debt” through a separation agreement. That’s all well and good if the debt is getting paid, but the separation agreement does not change the original agreement with the lender. The lender can still go after the both ex-spouses if the debt is not getting paid in full. When I encounter this situation, I ask about how the relationship is working after the separation. In cases where the separated or divorced couple has regular communication and an appropriate level of trust, it is possible to file a joint consumer proposal so that both parties are protected. Being married is not a requirement of doing a joint proposal.

What if my parent cosigned my student line of credit or other loans?

If, as the child/debtor, most of your debts have been cosigned by your parents, it may not make sense to file a consumer proposal or even bankruptcy. Since your parents will be called upon to repay the loan anyway, it may make sense to work with them to repay the loan together. If you have significant other debts, then it still may make sense to file a proposal or bankruptcy to get rid of those debts.  

If you are the parent/debtor and you have cosigned a loan for your child, you may now worry about hurting your child’s credit rating if you file a proposal. In most cases, the child is already making the payments. If the parent files a consumer proposal, the child would continue with the payments, and their credit is only hurt if they fall behind on the payments.

As you can see, deciding on the right course of action when you are struggling to repay cosigned debt can be complicated. The first step is to book a free, confidential consultation with a Licensed Insolvency Trustee so we can review your situation and provide you with the best advice on how to proceed.

The post How Is Cosigned Debt Treated in a Consumer Proposal? appeared first on Hoyes, Michalos & Associates Inc..

What is a joint debt and how does it work?

When you borrow money with someone else, like your spouse, you are entering into a joint debt.

Generally, joint debts can occur when:

• Both parties apply for and sign a loan agreement as co-borrowers
• One party co-signs or guarantees payment of another person’s debt

How joint debts work:

With a joint debt, you’ve entered into a contract, therefore you and your co-signer share equal responsibility for all payments.  Neither of you can opt out of responsibility for repayment of a joint loan.  It’s important to understand that debt loads can’t be split 50/50. Both you and the co-signer are responsible for 100% of a joint debt. This is referred to as ‘joint and several’ liability.  That means that if one party fails to meet their obligations, the lender will look to the other party for payment of the full amount of the debt.

Before co-signing or co-borrowing on a loan, make sure that you and your partner are on the same page and understand all the risks that come with sharing debt. When entering into this agreement, remember that you will have to pay the loan back if your partner cannot. The same conditions apply if you’ve co-signed or guaranteed someone else’s old debt. What’s more, both of your credit scores become vulnerable in the event of default, as you are both considered borrowers in the eyes of the lender and the credit bureaus.

What types of debts can be joint debts?

Almost any debt can be a joint debt including mortgages, car loans, lines of credit and credit cards.

Joint credit cards

 Credit cards can be a bit more complicated to determine if both spouses are responsible for payment.

With a joint credit card, both parties have signed the credit card agreement and are equally responsible for the entire amount of debt incurred, not just half.

On the other hand, a supplementary credit card is an additional card for your spouse, adult child, or anyone else you allow to have added onto the card. The responsibility for the debt on a supplementary card often lies with the primary cardholder only. For example, you may have a personal credit card and allow a supplementary card for your spouse. Your spouse can make purchases on the account, but you would be responsible for all charges incurred on the card.

Note: There are specific terms and conditions with each credit card. Some credit cards will make the primary cardholder liable for all charges but also hold the supplementary cardholder liable. It is critical to read the terms of your credit card agreement carefully. Learn more about how responsibility is divided with supplementary cards.

Joint bank accounts and overdrafts

Many couples have a joint bank account. If this account has overdraft protection then, when this account is overdrawn, this becomes a joint debt. An overdraft is a borrowing facility like any other type of unsecured credit.

Co-signed and joint secured debts

Another common joint debt can be a mortgage secured by your family home. A car loan is sometimes also a secured debt when the lender takes the car as collateral for the loan. Both are common co-signed debts. Secured debts are not affected directly in a bankruptcy or consumer proposal if the payments on the secured debt remain current. If one spouse fails to make their payments, the lender may choose to seize the asset and look to the co-signer for any shortfall. If you have joint secured debts at the time of bankruptcy and want to keep those assets, it is important to keep up with all the monthly payments.

Am I responsible for my spouse’s debt?

A common misconception is that once you’re married, you’re automatically responsible for your spouse’s debt. This is not true. You are only liable for the debts on which you’ve co-signed because the law treats financial contracts as distinct from marriage. Only the spouse that signed for and incurred the debt is legally responsible to repay it. 

If you had no debt before entering a marriage, but your spouse did, you should think carefully before agreeing to assume legal liability for your spouse’s debts or applying for a joint consolidation loan. Once you co-sign or guarantee payment, the bank or creditor will look to you for payment of the full amount of the loan if your spouse defaults. You can work on a repayment plan together without necessarily assuming legal liability for your spouse’s debts. Another advantage of keeping pre-marital debts separate legally is that you can preserve one spouse’s credit rating in the event one spouse defaults on the loan and finds they cannot repay their debt in full.

What happens to joint debt if my partner files for bankruptcy?

If you and your spouse have a joint debt for which you’ve co-signed, and your spouse files for bankruptcy or a consumer proposal, you’re still responsible for that debt. At that time, your spouse can no longer make payments towards a joint debt and creditors can pursue you for full payment.

Do both spouses have to file insolvency to deal with joint debts?

The answer is no, not necessarily.  If one spouse has significant debts of their own plus some joint debts they may need to file a bankruptcy or proposal to deal with those debts.  If the second spouse is still solvent (can repay their financial obligations) there is no need for that spouse to file, as they can continue to service their joint debt.

However, if you are both overwhelmed by debt, joint or your own, it may be best for both spouses to consider a bankruptcy or proposal.  You can consider filing individually or filing a joint insolvency proceeding. Filing a joint consumer proposal, for example, can reduce the costs overall since there is only one file to administer.  A Licensed Insolvency Trustee can help you understand how each spouse should proceed if you have joint debt and are unable to make payments towards it.

What happens to joint debt in a divorce?

If you are facing divorce, your joint debt won’t be split in two by the creditor or lender. You and your spouse will continue to maintain equal responsibility of ensuring that all debt owed is repaid, even after divorce.

Once your joint debt is paid off though, remember to remove your name from it so you’re not liable for any future debt incurred by your ex-spouse.

Separation Agreements

Even if you and your former partner signed a separation agreement and your ex-partner agreed to pay the joint credit card, you’re still liable for the entirety of the debt if they fail to make their agreed upon payments. Separation agreements are between you and your spouse, not you and the bank. Any missed or late payments will affect both of your legal obligations and credit scores, regardless of who was ‘supposed’ to pay in the separation agreement.

In the case of a separation or divorce, talk to your bank before you sign a separation agreement about the possibility of getting two separate loans in each of your names to replace a joint debt.

You might also be surprised to learn that you and your ex-partner can file a joint consumer proposal or bankruptcy, if needed, even though you’re no longer together.

We understand that joint debts can be confusing. If you have any questions or are unsure about how to manage debts on which you’ve co-signed, don’t wait. Speak to a Licensed Insolvency Trustee who can help you find the best debt relief option for you and your significant other. The sooner you seek help, the more options you may have available to you.

The post A Complete Guide To Joint Debts appeared first on Hoyes, Michalos & Associates Inc..

So what happens when two people are liable to repay the same debt?

It is possible for two people to file a joint consumer proposal to deal with debt. Whether or not you need to depends on the answers to a few questions.

• Are you both in debt?
• Do you both need relief from your debts?
• Is a consumer proposal the right solution for both of you?

Let’s deal with some basics first.

What is a Joint Consumer Proposal?

Consumer proposals may be filed jointly by more than one person as long as all or substantially all of their debts are similar.

To understand this definition we need to look at two factors: similar and substantially.

• Similar can be interpreted as meaning that both parties are liable to repay the same debt. So if both a husband and a wife have co-signed on a bank loan or have joint names on a credit card, they each owe that debt.
• Substantially is a bit trickier. The law doesn’t actually define exactly what substantially is, but it has been interpreted to mean 90% of their debts are the same. This 90% rule is not strictly enforced – it is more of a guideline but essentially it would only make sense to file a consumer proposal together to deal with combined or joint debts.

For example, John and Mary are married.  John owes $40,000 in credit cards and other debts.  Mary is joint on $20,000 of the debts and has another $2,000 in her own debts.  90% of Mary’s debt is similar to John’s so they are eligible to file jointly.

To file a consumer proposal jointly, each person must be eligible to file a consumer proposal individually.  That means each person must:

• owe more than $1,000 to their creditors (even as a co-borrower),
• be unable or unwilling to pay their debts as they come due,
• have assets (the things that they own) that if sold, wouldn’t pay off their debts.

Advantages and Disadvantages

Should you file a joint proposal?

No one can be forced to file a consumer proposal. Even if you are married and one spouse decides to file, the other spouse is free to file or not, depending on their own decision.

There are two main advantages to filing a joint consumer proposal:

• The debt limit to file a consumer proposal is increased to $500,000 for a joint proposal, from $250,000 for an individual (excluding any mortgages on a principal residence).
• Some costs can be saved and therefore more money may be available to offer the creditors increasing the chances of success while keeping your payments affordable.

The downsides of filing jointly:

• a record of having filed a consumer proposal will appear on both parties credit report so you both will find your ability to borrow limited for a period of time;
• both persons are responsible for making the full payment (it’s like another joint obligation). So if one person doesn’t make the payment, the other must or the proposal will be annulled once you miss 3 payments.

Possible Scenarios

The only way to decide whether or not you should file jointly is to consider what makes the most sense for the family and their creditors. Each case is different and whomever you are working with to deal with your debts should walk you through all possible options.

While the most common approach when debts are substantially the same between spouses is to file a joint consumer proposal we have seen cases where:

• One spouse files a proposal and the other keeps doing what they have always done.
• One spouse files a proposal and the other files bankruptcy.
• Both spouses file their own proposals because that’s what makes the most sense for them.

Do you both need to file a consumer proposal?  Maybe, but you don’t have to.  At the end of the day each of you should do what makes the most sense for you and for the family.  Contact us today to book a free consultation so we can help you review the pros and cons of each alternative for both of you.

The post Joint Consumer Proposal: Dealing With Joint Debt appeared first on Hoyes, Michalos & Associates Inc..

What are joint debts?

Joint debts are debts that you sign documents with legally with another person.  Since you co-signed the documents, both you and the co-signer are jointly liable for repayment of the loan. You cannot contract out of a joint debt without the permission of the creditor.  This is important since that means you can’t agree to split the debt 50/50 in a separation or divorce. This is one of the risks of considering a joint consolidation loan with your spouse.

Common examples of joint debts include lines of credit, mortgages and credit cards.

 Joint credit cards can come in two forms, both a joint card and a supplementary card.

• A Joint Credit Card is where individuals have signed for the card and are responsible for the whole amount of the debt (not just half of it). The liability for joint credit cards in a divorce can prove to be a problem if not handled correctly during the separation.
• A Supplementary Credit Card is an additional credit card for your spouse, adult child or anyone that you wish to give the card to. Liability for supplementary cards depends on the clauses in the primary credit card contract agreement. In most cases the supplemental card holder has no responsibility for the debt because they did not sign the paperwork. However this is not always the case for all credit cards. They may assume liability for all or part of the debt by using the supplementary card. You should read your specific contract very carefully.

A common misunderstanding is that just because you are married, you are liable for your spouse’s debt.  This is not true. Getting married does not make you automatically responsible for your spouse’s debt. If you did not sign for the debt, you are not legally responsible for it. If your spouse files bankruptcy or a consumer proposal, and you are not considered a joint debtor, their bankruptcy or proposal will not affect you.

How will filing bankruptcy or a consumer proposal affect my co-signer?

A co-signer is generally needed because an individual poses a lending risk and the creditor feels that by having a guarantor on the debt, they have ensured that two people are now responsible for repayment of that debt.

If you file bankruptcy, your creditors can, and likely will, pursue your co-signer for collection. Your bankruptcy will not, however, affect your that person’s credit report as long as they continue to make payments on the co-signed debt.

What is a joint consumer proposal or bankruptcy?

If both spouses share substantially the same debts as joint debtors they have two options; they can each file a bankruptcy or proposal or they can file a joint bankruptcy or  joint consumer proposal.

Filing jointly is a process that covers both individuals at a lower cost than filing separate insolvencies. 

Your trustee would look at each of you individually, your incomes, your debts and your situation to decide if a joint or individual filing is possible and makes most sense.

It is even possible, and not uncommon, for divorced or separated spouses to file jointly to deal with debts from their previous marriage.

If you’re unsure whether your debts are joint or you’re wondering how a joint bankruptcy or consumer proposal process works, contact a Licensed Insolvency to review your situation and discuss all of your options. If in Ontario, contact Hoyes, Michalos for a free no-obligation consultation with one our local licensed bankruptcy trustees.

FULL TRANSCRIPT show #39 with Jason Quinney

For more information about joint debts, co-signers and how to deal with joint debts during a separation or divorce, listen to our podcast or read the full transcript below.

Doug Hoyes: Welcome to Debt Free in 30 where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I’m Doug Hoyes. It’s the end of the month so that means it’s time for another Frequently Asked Questions show here on Debt Free in 30.

Every day we gets lots of phone calls to our 310PLAN help line and dozens of people every week email the Hoyes Michalos team with questions. I keep track of those questions and we answer the most common questions on our frequently asked questions shows.

We get a lot of questions about what will happen to my spouse if I have debts and what happens to co-signers? So, today we’re going to answer all of your frequently asked questions about spouses, co-signers, supplementary card holders and joint debts. Before we get to those questions let me tell you some facts.

If you’re a regular listener to this show you’ll know that every two years we do a detailed study of everyone who files a bankruptcy or consumer proposal with Hoyes Michalos. We call it our Joe Debtor study and we talked about it back on show #36 which aired on May the 9th. You can go to Joedebtor.ca to read all about it. Here’s some interesting facts from that study. Of all the people who go bankrupt or file a consumer proposal, 40% are married or common law and 28% are separated or divorced. That means that more than two thirds of everyone we help either has a spouse or did have a spouse and it’s very likely that they had debts together. What do I mean by debts together? To answer that question and lots of other questions about whether or not your spouse is responsible for your debts, I’m joined today by Jason Quinney, a trustee who works in the Hoyes Michalos offices in Barrie, Vaughn and our Jane and Finch office in Toronto. Jason, welcome the show, how are you doing today?

Jason Quinney: Good, Doug.

Doug Hoyes: So, let’s start with that question, then. What does it mean to have debts together? So, explain that to me.

Jason Quinney: Well, having debts together, I mean a lot of couples when they go get loans they have to get a co-signer, so they co-sign debts together.

Doug Hoyes: So, the key point there is, we have both signed for the debt.

Jason Quinney: Yes.

Doug Hoyes: So give me some examples of where people would both be signing for the same debt.

Jason Quinney: Well, they could go into the bank for a line of credit. Sometimes you need a co-signer so they would both sign together for that line of credit.

Doug Hoyes: Why is the bank asking for a co-signer? What’s the typical reason that two people would be signing?

Jason Quinney: Usually it’s so they could have two people to collect from.

Doug Hoyes: Okay, so the bank wants their butt covered. It’s a lot easier to get money from one person then, or from two people as opposed to one.

Jason Quinney: Yep.

Doug Hoyes: So, a line of credit would be an obvious one. What types of debts are often joint where two people are signing for them?

Jason Quinney: Mortgages.

Doug Hoyes: That would be anther common one.

Jason Quinney: Yeah.

Doug Hoyes: So, what about credit cards. So, there are two different ways a credit card can have two people associated with it. You can have a joint credit card or you can have a supplementary credit card. So, let’s start with the legal concept, what’s the difference between, you know, legally, between a joint credit card and a supplementary credit card?

Jason Quinney: Well, a joint credit card would be a co-signed. So, both of you signed for it, where a supplementary credit card is when you get a credit card and then they ask you if you want another credit card for your spouse.

Doug Hoyes: And that’s a pretty common thing, you fill out the form and you’ve already qualified so-

Jason Quinney: And they always ask you if you want a supplementary one.

Doug Hoyes: You tick the box, boom there it is. So, your spouse, if we want to use that example, and the supplementary card could be for anyone, it could be for your adult child, it could be for your mother I guess. But let’s take the simple scenario of two spouses. So, I tick the box and say yep I’d like a supplementary card for my wife. Now, she hasn’t signed for it, so is she legally responsible if that card doesn’t get paid?

Jason Quinney: Legally, no.

Doug Hoyes: Because she didn’t sign for it.

Jason Quinney: Because she didn’t sign for it.

Doug Hoyes: Okay. So, let’s talk about real life then, tell me some stories about what happens in real life with supplementary card holders.

Jason Quinney: Well, in real life they will go after the second person.

Doug Hoyes: They will go after them. And so what happens? The first person has to go bankrupt, can’t pay, then they start getting the phone calls, the letters whatever.

Jason Quinney: To go after the second person.

Doug Hoyes: So, how do I know, if I’m listening to this today and I’m going gee, oh yeah we’re behind on the credit card bill, I wonder if I’m a joint card holder or a supplementary card holder. How can I figure that out?

Jason Quinney: Well, the easiest way to figure that out would be to look at your credit card statement.

Doug Hoyes: So, if both names are on the credit card statement.

Jason Quinney: Then likely –

Doug Hoyes: Likely we’re both liable for it.

Jason Quinney: Exactly.

Doug Hoyes: So, okay if we both signed for the debt, we’re both liable, and so does that mean I’m 50% liable, my co-signer is 50% liable?

Jason Quinney: No, a lot of people think that though. A lot of people think that they would be just responsible for half of the debt. But no, they would actually be responsible for the whole amount.

Doug Hoyes: So, it’s not 50/50, it’s 100%/100%.

Jason Quinney: Yep.

Doug Hoyes: So, if my co-signer, my joint card holder doesn’t pay, the bank is coming after me for the whole shot.

Jason Quinney: Correct.

Doug Hoyes: Okay, so that’s a pretty important distinction, then. So, just to review then, a joint debt is signed by both people.

Jason Quinney: Yes.

Doug Hoyes: So, if you remember signing the loan application form or the credit card application form, you’re joint.

Jason Quinney: Yes.

Doug Hoyes: It’s pretty much that simple. If you don’t remember signing for it, legally, well, maybe you forgot, but legally if you didn’t sign for it you may not legally be responsible but practically speaking okay, well, you’ve used the card it’s not uncommon that they’re coming after you for it.

Jason Quinney: Yep.

Doug Hoyes: Okay. So, in general, is my spouse – somebody I’m married to – automatically responsible for my debts because we’re married?

Jason Quinney: No.

Doug Hoyes: Now I get people coming into my office all the time saying well, the credit card company phoned me and my spouse isn’t paying, so they said I’m married I’ve got to pay, you’re saying that’s not the case.

Jason Quinney: Correct

Doug Hoyes: Why not?

Jason Quinney: Well, because you haven’t co-signed for it, you’re not joint on the debt; they can only go after the one person.

Doug Hoyes: So, it all comes down to who signed for it.

Jason Quinney: Exactly.

Doug Hoyes: It’s as simple as that. So, if my spouse didn’t sign for it, they’re not liable.

Jason Quinney: Yes.

Doug Hoyes: Simple as that, okay. So, let’s take this a step further then, let’s say that I’m in deep financial trouble, I decide to go bankrupt, my spouse does not decide to go bankrupt.

Jason Quinney: Okay.

Doug Hoyes: How does my bankruptcy legally affect my spouse?

Jason Quinney: Legally it’s not going to affect her at all, as long as the debts not joint.

Doug Hoyes: If the debts were joint, then –

Jason Quinney: Then the creditors will go after her, will go after the spouse.

Doug Hoyes: For the full amount.

Jason Quinney: For the full amount.

Doug Hoyes: So, if my spouse, if I’m considering bankruptcy or I guess a consumer proposal would be exactly the same and I’m trying to figure out the impact on my spouse, did they co-sign? We keep coming back to that same point. Because it’s like you said earlier, it’s a very common misconception oh well, we’re married I guess I’m on the hook for it. You know all the money goes into the same bank account, we pay all the debts together, legally that’s not the case. So, okay, legally if I go bankrupt it doesn’t impact my spouse. What about in real life?

Jason Quinney: In real life it’s going to affect. I mean the bankrupt isn’t going to be a very good co-signer. And so if you go and apply for a loan or a line of credit or a mortgage, it may be difficult.

Doug Hoyes: So, my bankruptcy finishes, we go off to the bank to buy a house, the bank’s going to say, oh you were bankrupt last year, much more difficult to get a mortgage, obviously.

Jason Quinney: Exactly, generally they’re going to want you to wait two years after your bankruptcy’s finished.

Doug Hoyes: In order to be able to get a decent rate.

Jason Quinney: Yes.

Doug Hoyes: So, my spouse is disadvantaged in a bankruptcy because I’m a lousy co-signer in the future.

Jason Quinney: Yes.

Doug Hoyes: I guess the flip side of that though is, I got rid of my debt.

Jason Quinney: Yep.

Doug Hoyes: So, there’s pluses and minuses, I guess you got to look at the big picture. Explain to me in a bankruptcy, and again we’re trying to figure out how a bankruptcy impacts on a spouse, how does surplus income factor into this?

Jason Quinney: Well, surplus income in a bankruptcy situation you have to look at both of the spouse’s income. Okay, so in a bankruptcy situation the spouse could be affected.

Doug Hoyes: Okay, so when you go bankrupt, so again let’s take the case of just the husband is going bankrupt, the wife isn’t.

Jason Quinney: Correct.

Doug Hoyes: Every month you have to prove what your family income is.

Jason Quinney: Yes.

Doug Hoyes: How does that work in practice, how do you do that?

Jason Quinney: Well, we would get the bankrupt to fill out a form, an income and expense statement and they would send that in with proof of their income.

Doug Hoyes: So, their pay stubs.

Jason Quinney: Pay stubs or a bank statement.

Doug Hoyes: And so it would be the pay stubs for both the husband and the wife, even though the wife isn’t bankrupt.

Jason Quinney: Yes.

Doug Hoyes: And the more your family makes, the more you have to pay in a bankruptcy.

Jason Quinney: Exactly.

Doug Hoyes: And we won’t go through all the real specific numbers now but in real general terms a family of two, so let’s say it’s just a husband and a wife, they’re allowed to make around –

Jason Quinney: $2,562 I think it is now.

Doug Hoyes: So, and that’s the number for 2015. So, if you’re listening to this in the future, the number might be slightly higher. But they’re allowed to make let’s say around $2,500, if their income is a lot higher than that because the non-bankrupt spouse has income, that potentially means the bankrupt spouse has to pay a little bit more.

Jason Quinney: Yes.

Doug Hoyes: But they don’t have to pay as much as if they were both bankrupt.

Jason Quinney: No.

Doug Hoyes: So, we factor out the non- bankrupt spouses –

Jason Quinney: Exactly, you use the bankrupt’s percentage of the income.

Doug Hoyes: So, if the penalty calculated, let’s say the family is $2,000 over the limit, if the husband earns all the income and the wife earns nothing, then the husband is paying the penalty on the $2,000.

Jason Quinney: Exactly, yeah.

Doug Hoyes: And the penalty is –

Jason Quinney: 50%.

Doug Hoyes: 50% so a $1,000. However, if both spouses have an equal income, then they’re $2,000 over the limit, then how much is the bankrupt husband going to have to pay?

Jason Quinney: Well, we would take out the 50% of the spouse’s income. And then they would have to pay 50% of that. So $500.

Doug Hoyes: So, $500.

Jason Quinney: Yep.

Doug Hoyes: Okay. So, the spouse’s income does matter in a bankruptcy but not as much as the income of the bankrupt.

Jason Quinney: Exactly.

Doug Hoyes: Okay, so I guess the answer to the question then, we’re going to take a quick break here and come back, but in a bankruptcy, the non-bankrupt spouse isn’t directly affected. But they are indirectly affected because the bankrupt might have to pay more, might have to pay less, it all depends. And they won’t be a great co-signer in the future.

Great, thanks Jason. We’re going to take a quick break and we’re going to come back and answer more questions about joint debts and spouses and how that all works when you’re in financial difficulty. You’re listening to Debt Free in 30.

Announcer:            You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.

Doug Hoyes: We’re back on Debt Free in 30. I’m Doug Hoyes and I’m joined today by Jason Quinney who is a Hoyes Michalos trustee. He works in our offices in Barrie, Vaughn and at our Jane and Finch office in the north end of Toronto. Today we’re talking about joint debts, spouses, what happens, who’s liable for what. And what we talked about in the first segment, Jason, was what really matters is who signed for it.

Jason Quinney: Correct.

Doug Hoyes: So, if both people signed for it, both people are liable for it.

Jason Quinney: Yes.

Doug Hoyes: And it doesn’t matter if you’re married or not when it comes to deciding who’s liable for something. It’s all who signed for it, that’s what matters. So, we talked about how a bankruptcy impacts a spouse. If I go bankrupt and my spouse doesn’t. And Jason you said legally, it has no impact on them but it could have repercussions down the road if they’re trying to jointly co-sign for a mortgage or something. So, does my bankruptcy appear on my spouse’s credit report?

Jason Quinney: No.

Doug Hoyes: So, there’s no notation whatsoever.

Jason Quinney: No.

Doug Hoyes: And the only impact then on my spouse’s credit would be in the example of a joint debt again.

Jason Quinney: Correct.

Doug Hoyes: So, if we’re both signed on the debt, I don’t pay because I went bankrupt, my spouse now is on the hook.

Jason Quinney: Yes.

Doug Hoyes: So, what happens if I go bankrupt and we’ve got a $5,000 credit card together? And my spouse says well, okay I’m not going to go bankrupt for $5,000. If they continue to pay it will that have any negative impact on their credit report?

Jason Quinney: No, as long as they continue to pay it.

Doug Hoyes: That’s the key.

Jason Quinney: That’s the key, yep.

Doug Hoyes: So as long as – so, even though I’m bankrupt, that non- bankrupt spouse can keep paying. It’s not a big deal.

Jason Quinney: Yes.

Doug Hoyes: So, what about then with – let’s make sure we’ve clarified that then – so, let’s say my parents co-signed a loan I got. I go bankrupt, what happens to my parents?

Jason Quinney: They will go after your parents for the loan.

Doug Hoyes: And so what advice would you give my parents then? What are their choices?

Jason Quinney: Their choices would be to pay it.

Doug Hoyes: And if they’re not able to pay it, then they –

Jason Quinney: Well, it depends. I mean the parents they could be elderly so they could be creditor proof. So, they may not have to pay it, if they don’t have any assets.

Doug Hoyes: So, just explain what you mean by creditor proof? What are you talking about there?

Jason Quinney: If somebody’s not working. So, if somebody’s elderly and they’re on a pension, they don’t have any assets, they could be considered creditor proof or judgment proof where they can’t get – a creditors not going to be able to sue them and get a judgment against them.

Doug Hoyes: So, and the key is being able to get something from them, I guess.

Jason Quinney: Yes.

Doug Hoyes: So, you can sue anybody for anything.

Jason Quinney: Yep.

Doug Hoyes: The sky is blue I’m going to sue you for it.

Jason Quinney: Yep. Typically judges aren’t going to grant a garnishment against somebody’s pension.

Doug Hoyes: Because in Ontario, and the rules maybe slightly different in other parts of the country, but in Ontario, the Ontario Wages Act is pretty clear. You can only garnishee –

Jason Quinney: Income.

Doug Hoyes: Yeah, wages.

Jason Quinney: Wages, yep.

Doug Hoyes: So, if you have a pension then that can’t be garnisheed. The only exception I’ve seen would be if you haven’t paid your taxes, Revenue Canada has the ability to withhold some or all of your CPP payments.

Jason Quinney: Yes.

Doug Hoyes: Cause they’ve already got their finger in that pot. But, if you’ve got a normal company pension, you haven’t paid your credit card bill, they aren’t going to be able to, under normal circumstances, get a judgment, they can get a judgment but they won’t be able to garnishee that.

Jason Quinney: Yeah.

Doug Hoyes: So, is there any way for the bank to collect from my elderly parents who co-signed this loan before I went bankrupt? What other advice would you give them? In terms of, they’re still banking at the same bank, is that potentially a problem?

Jason Quinney: That could be a problem. If they’re still banking at the same bank where the loan is co-signed with, the bank can go into that bank account and take any money that’s in there and put it towards that loan.

Doug Hoyes: Without having to go to court.

Jason Quinney: Without having to go to court.

Doug Hoyes: Because –

Jason Quinney: Because when you open up a bank account it says in the small print that if you owe them money they can technically take the money.

Doug Hoyes: And I guess even if legally they can’t, well it’s their computer system, it’s not too hard. And so have you actually seen that happen?

Jason Quinney: Yes.

Doug Hoyes: So, if someone is listening to us today saying okay I’ve got a bunch of debts, I know that one of my debts is co-signed by my parents, what kind of – what’s the thought process then? What kind of advice do you give someone like that?

Jason Quinney: I would advise them to open up a new bank account with a different bank, with a different institution.

Doug Hoyes: Got you. So, and that way at least they don’t have to worry about something coming out of their bank account that they didn’t know.

Jason Quinney: Exactly.

Doug Hoyes: And I guess when I’m talking to someone like that I say well if your number one worry is I want to make sure that my parents are protected, then what you could do if it’s a relatively small debt, compared to all your other debts, is you could deal with your parent’s debts first.

So, okay fine I’ve got this $5,000 joint credit card that they helped me get 10 years ago and their name’s still on it, so before I go bankrupt, I’m going to help my parents get that paid down or even paid off which of course means all my other debts are going to be really old. But at least then, they are protected. If they’ve co-signed for my $50,000 student line of credit, well, I’m not going to be able to pay that off, and I guess in that case the best advice for the parents, if they actually do have some income, they do have some assets, they should probably go to the bank, get it switched over entirely into their name, set up a new loan, maybe they can get a better interest rate and deal with it that way. Okay, can I go bankrupt on my own or is it a requirement that my spouse has to go bankrupt when I go bankrupt?

Jason Quinney: No, you can go bankrupt on your own.

Doug Hoyes: And how would I decide whether I go bankrupt on my own or whether I go bankrupt with my spouse?

Jason Quinney: Well, the main thing is you got to look at the debt, so are they joint debts? Is your spouse co-signed on them? Does she have supplementary cards on them? Or you could have common creditors. Do you both have the same creditors?

Doug Hoyes: And so, if we’re both on the same debt, that would be more likely that we would both then have to come up with some form of solution.

Jason Quinney: Yes.

Doug Hoyes: And would it be two separate bankruptcies that we’d be doing or would be doing a joint bankruptcy?

Jason Quinney: No, you could do a joint bankruptcy, or a joint consumer proposal.

Doug Hoyes: And that means it’s one process covering both of us.

Jason Quinney: Yes and it would likely be cheaper.

Doug Hoyes: So, when you say cheaper, how would it be cheaper? Let’s take an example then. So, I’ve got – well, let’s take the example of a bankruptcy. I’ve got some debts, my spouse has some debts, some of them are together, some of them are not. If we both went bankrupt separately as opposed to both going with a joint bankruptcy, the cost isn’t going to be hugely different is it?

Jason Quinney: Not hugely different, but there is a difference because I would have to do two separate files. So, the two separate files, there would be cost on those two separate files.

Doug Hoyes: Because typically as a trustee, you’re going to say there’s a minimum cost, a couple of hundred bucks a month or whatever it is, so if you’re doing two files, potentially that minimum cost could double.

Jason Quinney: It’s going to be that cost times two. Exactly.

Doug Hoyes: The surplus income that we talked about earlier wouldn’t make any difference if it’s two separate bankruptcies or one bankruptcy.

Jason Quinney: No, you’re going to end up paying the same amount.

Doug Hoyes: You’re paying the same amount. So, I guess if you have joint debts or if you have some debts together or you both have debts, then you want to sit down with a trustee and crunch the numbers.

Jason Quinney: Correct.

Doug Hoyes: Okay, should we do the bankruptcy together or should we not? I guess one of the problems with doing a joint bankruptcy is, you only get discharged if both of you complete all of your duties.

Jason Quinney: Yes.

Doug Hoyes: And so what would be a common example of a duty that might not get completed if we did a joint bankruptcy. So, I do what I was supposed to do, my joint person doesn’t, what would be an example of something they wouldn’t do? What have you seen in your experience?

Jason Quinney: Sometimes people get divorced during the process. So, one spouse could take off. Maybe one spouse is sending income and expense statements and the other spouse isn’t. Cause if they’re separated then they got to send in two.

Doug Hoyes: Got you.

Jason Quinney: Other things maybe tax information, maybe one spouse provides their tax information and the other spouse doesn’t.

Doug Hoyes: Or attending the counselling.

Jason Quinney: Attending the counselling, exactly.

Doug Hoyes: So, if there’s any risk that your spouse isn’t going to be able to fulfill all their duties, that might be an option to do two separate bankruptcies as opposed to one.

Great, well I appreciate that Jason. We’re going to take a break and come back to wrap it up. Thanks for being here today to talk about joint debts. You’re listening to Debt Free in 30. We’ll be right back.

Let’s Get Started Segment

Doug Hoyes:   It’s time for the Let’s Get Started segment here on Debt Free in 30. I’m Doug Hoyes and today I’m joined by Jason Quinney, who’s a Bankruptcy Trustee and Consumer Proposal Administrator. We’ve been talking today about joint debts, co-signers.

So, Jason I want to talk about joint proposals. So we already talked about a joint bankruptcy and you listed a number of potential areas where you can get into trouble with a joint bankruptcy if one of the parties doesn’t fulfill all their duties. They don’t get their tax information in, they don’t prove their income every month, they don’t attend counselling sessions; I assume that most of those same issues could happen in a joint proposal.

Jason Quinney: Yep.

Doug Hoyes: Let’s start with the basics then. What is a joint proposal, what does that mean?

Jason Quinney: A joint proposal is when two people file a consumer proposal together.

Doug Hoyes: Okay, so instead of us filing two separate ones, we do one together. Why would we do a joint proposal?

Jason Quinney: If you have common creditors or joint debts, joint creditors.

Doug Hoyes: So, then it kind of makes sense.

Jason Quinney: Yes.

Doug Hoyes: Now is it going to be more expensive or less expensive if I file a joint proposal?

Jason Quinney: It would be less expensive.

Doug Hoyes: So, let’s take an example, then. Not that I don’t believe you but let’s actually crunch the numbers, then. So, we’ve got, between us we’ve each got let’s say $30,000 worth of debt, and most of that debt is joint. We both co-signed a $25,000 line of credit. So, in order to file a joint proposal you said we have to have commonality of debt. So, obviously if we both have a $25,000 line of credit, that’s – our debts are substantially similar. So, if I file two separate proposals, walk me through the math then.

Jason Quinney: Okay. So, if you file two separate proposals we would have to look at both. The amount of debt would be 100% for both separate files. So, we don’t split the debts, you can’t split the debts in half.

Doug Hoyes: So, I’m going to do a proposal, my debts are $30,000.

Jason Quinney: Yep.

Doug Hoyes: And let’s assume just to keep it simple here I don’t have a whole lot of assets, I don’t have a whole lot of surplus income. What kind of numbers am I going to have to offer to get the creditors to accept that proposal?

Jason Quinney: Probably around 10 to 12 thousand.

Doug Hoyes: So, something around a third, that’s kind of the typical number that most of the big banks are looking for, sometimes it can be less, sometimes it can be more. So, I go and I file a proposal, I got to pay $10,000, $12,000, whatever, my spouse is going to have to do the same.

Jason Quinney: Exactly.

Doug Hoyes: So, the total cost for us to do it individually –

Jason Quinney: It’s going to cost you $20,000.

Doug Hoyes: Whereas if we did one proposal together.

Jason Quinney: It would be $10,000.

Doug Hoyes: Okay, so that’s kind of a no brainer in that case.

Jason Quinney: Exactly.

Doug Hoyes: Now why can’t the banks figure it out when we both file a proposal separately on the same day that it’s both the same debt?

Jason Quinney: I don’t know.

Doug Hoyes: That’s just the way it is.

Jason Quinney: Yep.

Doug Hoyes: Okay, so it doesn’t make sense, but that’s just the way it is.

Jason Quinney: That’s just the way it is, yep.

Doug Hoyes: It all comes back to something we said in the first segment which is you are 100% liable for 100% of the debt. They don’t get split in half. So, if we got separated, but we still had all this debt together, could we still file a joint proposal?

Jason Quinney: Legally yes, you could if you’re separated. I wouldn’t want to do that.

Doug Hoyes: Why not?

Jason Quinney: Because there’s issues, because I mean a lot of the time there could be bantering between the two, the separated couple.

Doug Hoyes: I mean by definition we’re separated, so I guess we’re not getting along.

Jason Quinney: Yep.

Doug Hoyes: And so you’re afraid that if it’s going to be a five year proposal that the chances of us getting along for five years are kind of slim.

Jason Quinney: Exactly, yes.

Doug Hoyes: So, if I said okay we’re separated but I’m going to help my ex out by making all the payments in the proposal, legally that’s fine.

Jason Quinney: Sure, yeah.

Doug Hoyes: Practically though you worry about that.

Jason Quinney: Yes.

Doug Hoyes: Because if I don’t make the payments –

Jason Quinney: Then the other person’s – the proposal’s going to be annulled.

Doug Hoyes: Their pouched. And when you say a proposal’s annulled, what does that mean?

Jason Quinney: Well, if you fall three months in arrears, so if you fall three months behind in payments in a consumer proposal, then the proposal’s automatically annulled. So, it’s automatically cancelled.

Doug Hoyes: Okay, so you can be a little bit behind but if you get too far behind you’re toast.

Jason Quinney: Exactly.

Doug Hoyes: Have you ever done a consumer proposal for people who are separated?

Jason Quinney: No, but I’ve done consumer proposals where people get separated.

Doug Hoyes: In the middle.

Jason Quinney: In the middle.

Doug Hoyes: And some of them work, some of them don’t.

Jason Quinney: Yes. Most of them tend not to work.

Doug Hoyes: Yeah, it’s a bit of a risky situation. And part of it’s just simple math, I mean when we were together we were both earning X number of dollars a month, we had one mortgage payment, one rent payment, one phone bill, one cable bill. Once we get separated, our incomes don’t go up. But now we’ve each got our own rent, our own living expenses, so it’s a lot more difficult than to be making payments. Exactly, that becomes the practical consideration

Jason Quinney: Can they still afford to make the payments?

Doug Hoyes: Yeah and if they can’t – so, at that point what options do you have?

Jason Quinney: Well, you could go bankrupt, you could file a bankruptcy.

Doug Hoyes: And can you just split the proposal in half and I’ll pay half and you pay half?

Jason Quinney: No.

Doug Hoyes: So, that’s not really an option. I mean I guess you could –

Jason Quinney: You could, I mean half the person could be making half the payment, the other half could be making the other half the payment.

Doug Hoyes: So, the proposal is still exactly the same from the creditor’s point of view, it’s just that you’re paying for some of it and I’m paying for some of it.

Jason Quinney: Yep.

Doug Hoyes: But practically speaking a lot more difficult to do.

Jason Quinney: Yeah.

Doug Hoyes: Well, great I appreciate that Jason. Joint proposals they work in some cases, they’re not the perfect option in other cases, that’s a good way to end it. You’re listening to the

Doug Hoyes: Welcome back, it’s time for the 30 second recap of what we discussed today. On today’s show Jason Quinney explained that just because you’re married does not automatically make your spouse liable for your debts. And we discussed the difference between joint and supplementary accounts and what happens to co-signers in a bankruptcy. That’s the 30 second recap of what we discussed today.

I know we emphasised it many times during the show, but it’s a very common misunderstanding so I’ll say it again. You are only liable for debts you signed for. Just because you’re married does not automatically make you liable for your spouse’s debts. However, if your spouse has debts it may indirectly impact you, so it’s important to understand all of the implications of joint debt and debt owed by you and your spouse. So that you can come up with the debt management options.

That’s our show for today. Full show notes are available on our website including details on joint and co-signed debt. So, please go to our website at hoyes.com, that’s h-o-y-e-s-dot-com for more information.

The post Joint Debt and Co-Signing. Am I Responsible For My Spouse’s Debt? appeared first on Hoyes, Michalos & Associates Inc..

Co-signing a loan means that if the primary borrower does not pay the co-signer will have to. A co-signing agreement creates joint and several liability for the loan. That means that the debt is owed both together and apart from the primary borrower.

Right To Collect

You both owe 100% of the debt. The loaner can not get paid more than 100% of what is owed, but they are empowered to collect from both persons named on the loan. Collection actions can be taken against either party and can include legal action resulting in wage garnishment or liens against property for both the primary borrower and the co-signer.

Lets say for example that your father agreed to co-sign a loan because you were having some financial trouble, really needed help, but could not get the loan without your help. Now it is a year later and you lost your job and missed the last few payments on the loan. Upon the default in the loan by the primary borrower (you) the creditor will contact the secondary borrower, the co-signer, (your father) to make good on the loan.

Bankruptcy Eliminates Your Obligation, Not The Co-Signers

One of the advantage of bankruptcy is that you would be absolved of any unsecured debt. However this benefit does not extend to your co-signer.

You would not have to pay, but your father would still be responsible for any co-signed debt. In the case of a mortgage, your lender would foreclose on the home and sue you for any deficiency. Since you went bankrupt, you don’t have to pay this balance so your mortgage lender will then proceed to collect the remaining amount owing from your co-signer.

If You Are The Co-Signer

As a co-signer, you have no legal recourse against the primary borrower. You can’t sue someone for something that you agreed to do.

Co-signing a loan means you have to pay it. If you enter into such an agreement it should be done with the expectation that you will end up having to pay the loan back regardless any promises to pay you get from the primary borrower.

Co-signed loans will show up on your credit report and can have an effect on your ability to borrow, including your ability to qualify for a car loan or a mortgage, just as if you had borrowed the money yourself.

Be careful that co-signing a loan doesn’t lead to your own bankruptcy. Clearly one should not enter into any sort of co-signing agreement if you lack the ability to make good on the money borrowed. No one should put their financial future at risk to help out a friend. If your friend needs help you are far better to simply give them the money they need with no strings attached, and if you can’t afford to do that, then you certainly can’t afford to borrow money to give to someone else, which is exactly what you are doing when you agree to co-sign a loan.

If you have co-signed a loan that has gone bad, you need to know your options, a licensed bankruptcy trustee is your best source for real relevant and frank advice about your options.

We meet with many people who have co-signed debts. Sometimes filing a bankruptcy or proposal is still the right solution for them if they have significant other debts. It’s also not unusual for both the original debtor and co-signer to file a bankruptcy or proposal if both have debts they cannot repay. Contact us today for a free consultation so we can give you some options to consider.

The post Co-Signer Is Still On The Hook After Bankruptcy appeared first on Hoyes, Michalos & Associates Inc..

Who is responsible for credit card debt during or after divorce?

In a divorce, the obligation to repay credit card debts you owe cannot be legally assigned by a divorce agreement like assets.

Creditors cannot be bound by any agreement between you and your spouse. From your credit card provider’s point of view joint debt means that each of you is responsible for the entire debt. If you, or your spouse, continue to charge purchases to your pre-divorce credit accounts, the other spouse will become liable for any unpaid balances. Even if your spouse agrees to repay all the past credit card debt and this is formalized in your divorce or separation decree, creditors will look to you to collect, if your spouse fail to make those payments.

You and your ex-spouse may have signed a separation agreement and your ex-spouse agreed to pay the joint credit card. This agreement is between you and your ex-spouse and didn’t involve the bank. If your ex-spouse failed to pay the debt, you will be responsible for the all of the payments on the joint credit card; not just want you consider your share. Also, any missed payments or late payments will continue to affect your credit score no matter who was supposed to make them.

What to do about debt in your name during divorce

If you are getting divorced and think this will be a concern, talk to you bank before you sign the separation agreement about getting two separate loans in each of your names to pay off the old joint debt. Your bank probably won’t just remove your name from the account if there is an existing balance. They will want to be sure they can collect, despite your divorce. If you have good credit, you can each borrow your share to pay off the full balance.  Once the old accounts have been paid off and balances transferred, close the pre-divorce credit accounts if that’s possible. At a minimum, get in writing from the bank any adjustment to the agreement as to who is responsible for payments.

When divorce debts cause a financial problem

If your spouse stops making payments, or files bankruptcy, and the bank pursues you will need to make a plan to eliminate those credit card debts.

If you are financially able you can make a payment arrangement with the creditor.

If you have other debts and paying off these pre-divorce debts becomes a problem, contact us to talk about your options.  You can file on your own, or if necessary, both divorced or separated spouses can file a joint bankruptcy or joint consumer proposal if that makes sense.

The post When Your Ex-Spouse Fails To Pay Credit Card Debt appeared first on Hoyes, Michalos & Associates Inc..

Deciding to tackle debt repayment as a team is not the same as legally consolidating marriage debt. Here is what being married means for your debts

Bringing Debt into Marriage

Getting married does not make you responsible for your spouse’s debt.

The law treats financial contracts as distinct from marriage. Only the spouse that signed for and incurred the debt is legally obligated to repay the debt. Debts in your name will remain your debts, and debts incurred by your spouse or partner will remain theirs alone.

A husband or wife should think very carefully before adopting the other partner’s debt. While it is important to discuss each other’s financial situation and create a household budget to address common debt concerns, there is no legal reason for either spouse to assume responsibility for the other spouse’s existing debts once married.

New Debts – Joint Debt vs Personal Debt

New debts in a marriage can be more complicated. New debts may be personal debts owed by only one spouse, or they may be joint debts.

Just like premarital debt, your marital status alone does not create an automatic obligation for new debt incurred by your spouse.  You cannot be held legally responsible for debt unless you sign for it yourself. 

Depending on the nature of the debt you are applying for, a lender may

• require both spouses to sign a loan for debt as co-borrowers,
• allow one spouse to borrow if the other cosigns or guarantees the debt, or
• permit each spouse to acquire and assume individual personal debt.

If you cosign or guarantee debts, your lender will look to the second spouse if the first doesn’t make payment. These types of debts are commonly referred to as joint debts because you both are liable for repaying the entire loan.

From a practical standpoint, large debts – mortgages and car loans, high limit loans, and lines of credit – are almost always issued jointly to married couples. Lenders often look to the debt-to-income ratio of both spouses to prove they can afford the loan payments before qualifying a loan application. If a lender requires both spouses to sign for new debt, both spouses have a legal liability to repay the entire debt.

Marital Assets and Marriage Debts

Another common concern is what happens when a couple has marital property, like a home. Can a creditor seize family assets to collect on an unpaid debt?

If the debt is a secured loan, a mortgage or a car loan, for example, a creditor has the right to repossess the asset or collateral offered at the time the loan was signed if the loan is in default. This is why you should think very carefully before consolidating spousal debts with a joint consolidation loan through a secured debt using your home equity.

But what about unsecured debts like credit cards or tax debts. Can an unsecured creditor pursue marital property for money owed by one spouse? The answer is yes, but it’s complicated. An ordinary unsecured creditor, like your bank or a utility company, could obtain an order from a judge allowing them to place a lien on a debtor’s property, including the family home. The Canada Revenue Agency can place a tax lien on the property of the debtor without a court order.

Spousal Debts and Credit Score

One spouse’s credit score, bad or otherwise, will not affect their partner. Your credit report lists credit accounts that are in your name and provides a record of your credit history. Only accounts you have signed for legally will be included on your credit report and affect your credit score.

This is a common question if one spouse has high debts and is considering bankruptcy or a consumer proposal.

One of the most important things to remember at this point is the law treats each spouse as a separate and distinct individual.  One spouse may need to file for bankruptcy – that does not mean the other spouse has to do the same thing.  It is fairly common for one spouse to have financial problems serious enough to require a consumer proposal or bankruptcy, and for the other spouse to stay clear of the entire procedure.

Your filing bankruptcy, or a proposal, does not affect your spouse’s credit report.

Tackling Debt – Together or Separate?

What we typically see in a marriage is a mix of debts: yours, mine, and ours;  your existing and new debt, my existing and new debt, and our joint debt accumulated since we got married.

If you are starting your marriage in debt, it’s not the end of the world. However, you don’t want the pressure of financial problems to lead to a relationship breakdown. The key is open, honest communication and a commitment by both partners to work together to pay off debt so you can build a less financially stressful life together.

Here are my top tips for dealing with marriage debt:

1. Discuss a repayment plan ahead of time.
2. Prepare a family budget.
3. Postpone major purchases (and perhaps a family) until after the debts are dealt with.
4. Consider carefully before cosigning on your spouse’s premarital debts.
5. Don’t open a joint bank account at the same bank where one spouse owes any debt.
6. Discuss any decision to take on new debt together.
7. Consider a pre-nuptial agreement to protect any assets in the event of a marital breakdown.

If one or both spouses find themselves in severe financial difficulty after they’re married, it’s time to review your debt management options.

The options to deal with money problems after you are married are the same as those available to single people to deal with their debts, plus, the couple may have the option of dealing with them jointly (together).

Each couple in a marriage has these same debt relief options:

• Refinance or restructure your debt to make it more manageable. You need to decide if it makes sense to put up family- or jointly-owned assets as collateral or to cosign a new loan to support unsecured loans of only one partner. Remember, if you are not liable today, you will be if you cosign or guarantee your spouse’s debt.
• One spouse, or both spouses, can file a consumer proposal or bankruptcy to deal with their debts individually.
• The couple might have the option to file for joint debt relief.

The key is communication and exploration of your options. Marital debt issues can get complicated, especially if a divorce or relationship breakdown is also part of the equation. For advice on how to deal with the debt, contact a Licensed Insolvency Trustee for a free, confidential consultation.

The post Marriage and Debt: Who is Liable? appeared first on Hoyes, Michalos & Associates Inc..

“I took over a joint credit card after my wife and I separated and only I have charged items to the card since the separation. I have now cancelled that credit card. Will my ex-spouse will be responsible for the balance on the card if I go bankrupt?“

Today I’d like to address the issues around divorce and credit card debt. There are two factors that will impact legal liability for credit card debt during a divorce or separation:

1. what does joint and severally liable mean when it comes to joint credit cards, and
2. can joint debts be removed by virtue of a separation or divorce agreement.

Liability for joint credit cards

Not all credit cards are joint credit cards. If you have a credit card issued in only your name, with no spousal card, then your spouse or ex-spouse cannot be held liable for any charges or balances.

Spousal cards however can create a liability for the secondary cardholder. Determining whether or not a supplementary card is responsible for debt depends on the terms and conditions of the credit card agreement itself.  If the credit card is a joint credit card, both spouses will be considered ‘jointly & severally’ liable for all debts. That means that both spouses will be liable for the full amount of the debt, including any interest that accrues after the card is cancelled. Cancelling a credit card after divorce does not cancel the outstanding debt to either party.

Using credit cards after a separation

The second issue surrounds how debt is treated in a separation or divorce. Unlike assets, credit card debt cannot be separate by a divorce agreement. Your spouse may still be liable even if you think they are not.

In our example above, the credit card remained in both names after the divorce and as a result the credit card company has the right to look to the ex-spouse to cover the balance if the current user of the card filed for bankruptcy. This includes not only debts that existed at the time of divorce, but any charges made on this card after the divorce.

Just like cancelling a card does not eliminate the liability of the joint card holders, neither does a divorce or separation agreement, formal or otherwise, limit the liability of any spouse from the lender’s perspective. You might agree you will be responsible for making all payments on the card, but without the credit card company’s express written consent, both joint cardholders will remain liable for past and future debts on the joint card.

A request can be made to the credit card company to remove the name of a joint cardholder or co-signor, but if there is a large unpaid balance, as in this case, it is unlikely they will agree. Sometimes the credit card company will do this if proof can be shown that only one person has charged items to the card since the card was first used and has the capacity to pay the balance. The original terms and conditions of the cardholder agreement can also come into play.

Cancel cards upon separation, not after

It is better to cancel all joint credit cards upon separation and open new credit cards in just single names. That way the balance on the old card can be paid jointly or covered in the separation negotiations and the new cards will be in the individual names and the responsibility of the charging party only. It’s important to remember as we noted above, that even if the divorce agreement requires one party to pay off the balance, the credit card company will still pursue the joint cardholder if they fail to make payments unless the credit card company specifically agreed to have the second cardholder’s name removed from the card.

Divorce, bankruptcy and credit card debt create a complicated trifecta.

Before you file a bankruptcy or proposal, contact us for a free consultation to ensure that the solution you choose will work for both you and your ex-spouse.

The post Who’s Responsible to Pay Joint Credit Card Debt After Separation or Divorce appeared first on Hoyes, Michalos & Associates Inc..

One spouse applied for a credit card, and when asked “would you like a card for your spouse?” answered yes, so they received two credit cards – a primary card and a supplementary credit card. If the primary card holder files for bankruptcy, is the supplementary or secondary credit card holder liable for the debt?

Is the secondary cardholder liable for debt?

A primary cardholder is liable for all charges and debts on an account, whether charged with the primary or secondary card. A supplementary cardholder’s liability is defined by the terms of the credit card agreement.

We have seen terms and conditions that result in 3 scenarios of legal responsibility for the secondary or authorized user:

• only the primary cardholder being liable for all charges and debts incurred on both the primary and supplementary card;
• both the primary and supplementary cardholder being jointly liable for all charges and debts incurred on both cards;
• the primary cardholder being liable for all charges and debts while the supplementary cardholder is responsible only for the charges on the supplementary card.

Why you need to read your cardholder agreement

The true answer lies in the specific terms and conditions of the credit card itself and each credit card is different.

Here’s an example from a “pre-approved” credit card application I received in the mail. It already has my name on it; all I have to do is sign it, and I am pre-approved for a new credit card. At the bottom of the application is a space for me to write in the name of a supplementary card holder; if they sign it, they can have a card on my account.

The fine print on the back of the application reads as follows:

The card holder agrees “that the basic card holder will be liable for all charges incurred with the cards issued to the basic card holder and any supplementary card holders.”

Further, the card holders “agree that each supplementary card holder will be liable jointly and severally with the basic card holder for all charges incurred with the supplementary card issued to him/her.”

In this particular case:

• the primary card holder is responsible for all charges: those they incur and any charges put on the credit card by the supplementary card holder,
• the supplementary card holder is, at a minimum, responsible for all charges they charge on their card.

Another complication or exception to consider is if the supplementary card holder never applied for the card, never signed for the card, and never used the card. In that case, they may have a chance of proving they are not responsible for the charges.

Read Transcript

What to do if worried about joint credit card liability

My advice? If you are going bankrupt to get credit card debt relief and share a credit card with your spouse or someone else:

1. Carefully review the terms and conditions on all of your credit cards to determine if anyone else may be responsible so that you have a plan in place for dealing with those debts before you go bankrupt or file a consumer proposal.
2. Contact customer service for the credit card company if you are not sure what the terms and conditions mean or don’t have a copy of your original agreement.
3. Talk with your licensed insolvency trustee.  We can help you review each cards terms and conditions and determine who may be liable under each credit card you share. Your trustee can also explain how bankruptcy will affect your spouse and help you develop a plan together such as filing a joint consumer proposal or bankruptcy if your combined debts are significant.

This is a complicated area, so we encourage you to contact us so a licensed insolvency trustee can meet with you to review your credit cards and other debts and work out a plan that will give you, and your significant other, a fresh start.

The post What Happens to a Supplementary Credit Card Holder if I Go Bankrupt? appeared first on Hoyes, Michalos & Associates Inc..