If your spouse has accumulated debt, you may fear being responsible for it. What is it really?
A reader recently asked us if he could be held responsible for his spouse’s debts and if he should pay them. A worrying question, as this could not only put one’s finances at risk, but could also have a negative impact on one’s credit report.
From the outset, Sophie Desautels, Raymond Chabot’s First Senior Director and Chartered Insolvency Trustee, is reassuring. “The basic rule is that everyone is responsible for their own debts. Only joint debts can be shared,” he says.
He adds that two situations require special caution: when you assume a debt contracted by your spouse or when you are a co-borrower with them.
Assume or guarantee the spouse’s debt
If your spouse has contracted a debt, a loan for example, and you have guaranteed it or acted as guarantor, in this case you will be fully responsible if it does not repay the creditor. “You will be considered jointly and severally liable for the debt if your spouse does not pay,” specifies Sophie Desautels.
Did your spouse apply for a line of credit and you acted as guarantor or guarantor? If you went bankrupt, you would be free of that debt, but be careful, because you won’t be. “You would still be 100% responsible, and not just 50%, in the eyes of the creditors, who could therefore turn against you to get their shares,” explains Sophie Desautels.
Be a co-borrower
If you bought a car with your spouse, you will be considered a co-borrower. Your name will appear as a buyer with that of your co-borrower in the Registry of Personal and Real Estate Rights (RDPRM). “In this case, again, the two co-borrowers are 100% responsible for the debt contracted, and not just 50% as you might think,” says Sophie Desautels.
Also keep in mind that if your spouse is late on their payments, your credit report could suffer.
Even worse, if the bankrupt co-borrower were to file for bankruptcy or a consumer proposal and is discharged from the debt related to the vehicle, they will not be discharged and will be responsible for 100% of the debt.
The mortgage loan
When you buy a house with your partner, things get complicated in the event of insolvency. “If one of the two spouses declares bankruptcy, there is equity in the home and the couple is in a civil union, the other could have to pay an amount in the context of the bankruptcy to be able to buy back the part of the property . house and be able to keep it”, warns Sophie Desautels.
If there is equity, the trustee will instead recommend the consumer’s proposal to avoid this type of situation and preserve the property.
But if there is no equity, as long as the mortgage payments are up to date and regular repayments continue to be made according to the terms of the loan, the home can be kept despite the bankruptcy.
· Is your spouse asking you to guarantee or endorse a loan made in their name? Before you sign, think carefully about what it will mean for you if you don’t pay your debt.
· Remember that if the creditor asks to guarantee the loan or requires a guarantee, this means that the credit history of the borrower is not good enough. This is a sign to consider in your thinking. At the very least, a good discussion with your spouse about the reasons for their poor credit score is necessary.
- Do you have an additional credit card on your spouse’s credit card account? In some contracts, even if you are not the primary owner, you could find yourself liable for their debt. Carefully check the contract between you to find out whether you would be responsible for the full amount of the debt if the primary holder defaults.