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When it comes to divorce in Ontario, the equalization of net family property between you and your spouse will be a major component. When one spouse has large amounts of debt going into a divorce, the process of equalization can be affected significantly. As a result, high-debt divorces can often become complex.
At Gelman & Associates, our Toronto family lawyers regularly help clients navigate debt-related challenges during their separations and divorces. If you have questions about your legal rights and obligations, you can discuss them with our legal team. To schedule a consultation, contact us today.
How Does Debt Impact Equalization of Property in Ontario Divorces?
When you get divorced in Ontario, you do not divide assets or property individually. Instead, according to the Family Law Act, you and your spouse must equalize your net family property (NFP). To determine your individual NFP, you will calculate the total value of the assets you accrued during your marriage minus your liabilities. Whichever spouse has a higher NFP will make an equalization payment to the other that is equal to the difference between each of their net family property values.
When a person getting divorced has a large amount of debt, it can affect their net family property value significantly. This is because their liabilities may exceed (or come very close to exceeding) the value of their assets. In such cases, an individual with high debt may have a very low NFP, or may even have a net worth that is equal to zero. It should be noted that an individual’s NFP can’t drop below zero or become negative, even if they are in debt.
If one spouse has a higher proportion of debt in comparison to the other, their NFP will be much lower. As a result, they may be entitled to a large equalization payment. For example, if one spouse has significant debt and the couple owns a home together, the more indebted spouse may walk away with more equity after the divorce.
Who is Responsible for Debt in a Divorce?
Debts always remain the responsibility of the name-holder. This means that you are only legally responsible for debts taken out in your own name. Spouses are not held liable for each other’s debt unless they’ve co-signed or guaranteed it.
However, although liability for debt does not transfer to spouses, it can still affect the equalization of their property. If you have a much higher NFP than your spouse because of their debt, you may end up owing them a large equalization payment when you divorce.
It’s important to note that bankruptcy can also play a significant and complex role in the equalization of your net family property. Depending on when a spouse declares bankruptcy, it may affect who receives or owes equalization payments. In addition, if a spouse declares bankruptcy during divorce, their trustee will become involved in the process.
Bad timing can significantly complicate the divorce process. You should always consult with a Toronto family lawyer before declaring bankruptcy during divorce. This way, you can understand how your rights to equalization may be affected and discuss your best course of action.
How to Protect Yourself From The Impact of Debt in a Divorce
Addressing debt in a divorce can be stressful, especially if it’s going to affect the equalization payment you need to make. However, there are steps you can take to protect yourself from both debt liability and the effect of debt on your potential equalization payment.
For example, you can:
- Watch for Hidden or Forgotten Debts: Sometimes, people with many liabilities may not disclose the extent of their debt to their partner. In addition, they may take out debts jointly without your knowledge. It’s important to thoroughly monitor your finances to ensure there are no surprises, such as a forgotten joint credit card or a secret line of credit. Creditors can pursue repayment from a spouse years after a divorce for joint debts that were hidden.
- Use Indemnification Clauses: An indemnification clause is a provision in your separation agreement or court order that will protect you from any undisclosed or joint debts your spouse accrued. Although an indemnification clause cannot stop a creditor from contacting you, it can protect you from a lawsuit if you’re sued for debt that isn’t yours.
- Argue for Unequal Division: If your spouse has incurred debt in bad faith, and it has significantly affected your equalization payment, you may be able to argue for an unequal division of property in court. To file an unequal division claim, you’ll need to prove that it would be unfair, or “unconscionable,” to split your property equally. Some examples of debt incurred in bad faith include:
- Hidden or secret real estate purchases
- Debt related to illegal activity, gambling, or substance use
- Poor or purposeful business decisions that drastically affected marital assets
It’s important to note that unequal division claims can be very difficult to win and will require strong legal representation and documentation.
Although the Family Property Act stipulates that equalization of net family property should take place upon divorce, spouses can choose to agree to an alternative arrangement. This is possible even if you do not make an unequal division claim in court due to unconscionability. Spouses can collaborate through mediation to negotiate and agree to an unequal division of their property. In addition, if you signed a marriage contract (sometimes referred to as a prenuptial agreement) before or during your marriage, you may be offered some protection from the equalization process.
Need Help Navigating a High Debt Divorce? Contact Gelman & Associates Today
High debt can introduce an extra layer of complexity to the already challenging divorce process. Even if you are not liable for your spouse’s debts, they can still greatly affect the way your property is divided. By seeking legal advice early on in the process, you can confidently navigate situations involving significant debt, bankruptcy, financial misconduct, and more.
At Gelman & Associates, our Toronto divorce lawyers can help you navigate your rights and protect your financial future if you’re involved in a high-debt divorce. Whether you’re facing liability for your spouse’s undisclosed debts or you’re unsure how equalization will be affected, contact us today to book a confidential consultation. We can discuss your legal options and next steps.
