Debt in Your Spouse’s Name
While you might feel a moral responsibility to help with your spouse’s debt, legally it belongs to your spouse. If your spouse files for bankruptcy or a consumer proposal, you do not become responsible for the debt. It was only in your spouse’s name and is a part of their insolvency proceeding.
Debts in Both Your Names
If the debt is co-signed, or if you have a supplementary credit card, you are both responsible for the debt. An example, would be a bank loan you took out together. This means that you are both responsible for 100% of the debt. It is not split 50/50 between you. If your spouse files for insolvency, the lender will look to you for full payment of the debt.
Supplementary credit cards are very common for spouses. If you are not sure if you’re an authorized user or if you have a supplementary card, just call the lender and ask. If you are a supplementary card holder, you are responsible for your spouse’s charges. If you are an authorized user, you are not responsible for the debt.
What Happens in the Event of Marital Separation?
Even if you have a legal separation agreement that states your spouse will pay the co-signed debt, you are still responsible for it. The lender does not release you from the debt just because you have a signed paper with your spouse.
Real Life Examples
In my first example, Kevin came to see me about filing bankruptcy. He had $25,000 in credit cards and loans. Helen, his wife, was concerned that she would have to pay the $25,000 debt or file bankruptcy. However, as she was not a co-signer or a supplementary card holder, Helen was not actually responsible for the debt. They were happy to learn that she didn’t have to file bankruptcy too.
In my next example, Deborah had taken out a $25,000 loan to help her small business, and Mark, her husband, co-signed the loan. Unfortunately, the business failed and Deborah could no longer afford to pay the debt. I explained that both Deborah and Mark were each responsible for the debt. If only Deborah filed an insolvency proceeding, Mark would still have to pay the $25,000 owed to the bank. We discussed their situation and a joint consumer proposal made the most sense for them.
In my last example, Sal and his ex-wife, Vivian, came to meet with me. Due to job loss and medical expenses, Sal had $35,000 in credit card debt and a $5,000 line of credit that Vivian had co-signed. Sal decided to file a consumer proposal to deal with his debt. However, because Vivian co-signed on the line of credit, it was not eliminated in Sal’s proposal. Instead, liability shifted from Sal to Vivian. She continues to make payments on the $5,000 line of credit and has made a plan to have paid in full in the next year.
As you can see, what happens to your debt when your spouse files insolvency depends on the type of debt you owe, who owes the debt, and your financial situation. While the above scenarios help illustrate how different debts are affected when a spouse files insolvency, I recommend meeting with your local licensed insolvency trustee. They will be able to review your debts, provide clear answers and discuss different options that work for you and your spouse.