Jun 6, 2013

I have been long awaiting the changes now being implemented for separating families when it comes to debt and creditors. Governments have recently declared that the debts incurred during the relationship that are still owed on the separation date, or are incurred to maintain family property after separation - are assumed to be shared equally unless other arrangements are made in an agreement or court order.

This amendment to family law brings us into the 21st Century especially when you consider money issues are the primary cause of marital breakdown, and we are in the midst of a moment of public recognition that our levels of household debt are troublesome.

This is the theory – debts incurred during the relationship or are incurred to maintain the family after the separation are to be shared equally. The practice is and will likely to continue to be problematic.

To start with debt is a complex issue that intermingles with another complicated thing called property ownership.

The spouses may not own everything. Creditors may have a priority claim against certain assets like a mortgage or car loan. Third party property refers to stuff owned by someone else like a relative, friend or leased property.

Children’s property will likely be fuzzy even though the new legislation exempts children property from the table. Registered Education Savings Plans (RESPs) are a good example because these funds are the parent’s property, not the children’s even though they are saved for their future education (the children do have to attend post-secondary educational institutions). RESPs are also not exempt from bankruptcy.

Debt enters the family stage from many windows and doors. We have joint bank accounts, joint tenancy mortgages, joint debts (loans in both spouses name), separate debts like credit cards or student loans in only one spouse’s name, implied debts in one or both spouses names like debts owed to parents, undisclosed debts – where spouses borrow and do not tell the other – this happens sometimes in businesses that may have existing or contingent tax liabilities or with gamblers running up family credit cards or lines of credit and so on.

The topic of debt (and liability) is not always clear or simple. That is the first problem with bringing contracts for debt into family law. The contracts are already signed and creditors are already owed the money. This means the creditor will pursue the debtor – in other words the person who signed the contract. The family court may declare that the debts should be shared equally but if all of the debt is in one spouse’s name, the creditors will only execute their claims against that debtor, not both spouses.

There is nothing more forceful or antagonizing than financial pressure. Why? Because so much is at stake. The credit rating, the accumulated wealth over a long period of time and losing it like the sale of the matrimonial home, the division or early withdrawal of retirement pensions and savings (often used to pay legal costs) frightens people.
Next in line on the problem list is the short little phrase, “Unless other arrangements are made.” (in an agreement or court order.) This leaves the door open for the vulnerable to be pushed around by aggressive collection tactics from creditors. Spouses agree to make creditor payments in lieu of child support. This certainly is not the intention of the child support matrix in family law.

Separating families often receive poor advice from friends or professionals regarding debts because they are not experts in this particular area.

In all of these situations, children suffer – deprived of vacations, lost opportunities and in many many situations funding for post-secondary education.

Then there are disputes – about who owes what and who owns what. Most people do not keep receipts after years of purchasing furniture, pianos, or prove that the credit card debt is actually family debt. This is a climate that attracts litigation.

What separating families need is good advice and time to work things out in a separation agreement. Creditor pressure too frequently drives them into bad or unworkable separation agreements that inevitably fail. This is an area where I can help.