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Pay Off Joint Debts When You Divorce or Separate

It’s raining debt on your divorce plan. Divorce attorneys and family court require full and frank disclosure of all joint debts and assets when you ask for spousal support or apply to a court for child support. Start planning what you will do before debt gets the better of you. Photo by Igor Link|Pixabay.

Consolidating Your Debts

Those 19% to 29% interest rates add up fast on department store credit cards. Having one loan to pay can save your credit rating and get the bleeding stopped quickly. Your lender pays off existing debts. You make one fixed monthly payment. Credit card balances, utility bills or credit lines can be wiped out in a few days. 

Provided you are working and your credit rating is still good, you may not require collateral. Otherwise, your lender may put a mortgage or lien on your property until the loan is repaid, in two to five years. Missed payments affect your credit score. So before you sign, make sure the payments are affordable.

Getting Credit Counselling

When debt consolidation won’t work, credit counselling or a debt management plan (DMP) might. Credit counsellors give you advice on how to get out of debt and keep interest from adding to your grief. They can prepare a DMP that spreads unsecured debts for credit lines, loans or credit cards over a longer period, with lower payments. You pay the credit counselling agency, which pays your creditors. 

A DMP won’t reduce how much you owe or affect Canada Revenue Agency payments, student or car loans, mortgages or court-ordered judgments. But it could help you get out of debt faster. Costs include a 10% to 15% fee taken off the top of your monthly payment, one-time fee of about $50 to $100 to set up the DMP and possible agency membership fees. 

Your credit rating will be affected for up to three years after the DMP is paid off and you likely won’t qualify for new credit, such as a mortgage or car loan, until then.

Making a Consumer Proposal

Who wouldn’t want to show creditors and lenders they can manage their own finances? Consumer proposals do just that. You come up with a plan under the Ontario Bankruptcy and Insolvency Act (BIA) to pay off debts under $250,000 over up to five years. When the payments are done, you get a certificate of full performance to send credit reporting agencies.

Consumer proposals let you decide how much you can afford to  pay and how often or reduce the amount you owe altogether. Your proposal must give creditors the same or more than they would receive if you filed for bankruptcy. Mortgages or debts secured with your home are excluded from the $250,000 limit. 

To make a consumer proposal:

  1. Contact a licensed insolvency trustee (LIT) with a list of debts and assets. They will prepare the proposal. You pay around $1,800 in fees plus financial counselling costs.
  2. The proposal halts existing payments and stops legal actions against you. Creditors can’t garnishee your wages or take other steps to collect their money. Your credits have 45 days to accept or reject it.
  3. Creditors owed at least 25% of your total debts may request a meeting of all creditors to vote on accepting or refusing your proposal. If no meeting is requested, the proposal is accepted. 
  4. You make lump sum or monthly payments to the LIT, who pays the creditors and keeps 20% as compensation. Your LIT will organize two financial consulting sessions to help you budget and stay out of debt. 
  5. If your proposal is rejected, your creditors can begin or continue legal action against you. You have two options: change the proposal or declare bankruptcy. 
  6. You’re back to square one if you stop making payments to your LIT. The consumer proposal will be declared invalid and creditors can go after you again.

Your credit score will suffer while you are repaying the proposal and stay on your Equifax report for three years after, but the damage isn’t forever. 

Settling Debts Once and For All

When you’re tired of being in debt all the time, debt settlement companies can negotiate to see if your creditors will accept a reduced, one-time payment. You pay the company a flat fee for their services. They pay your creditors. Debt settlement may be for you if:

  • you can’t make your monthly minimum payments
  • have $10,000 or more in unsecured debts
  • prefer not to file for bankruptcy
  • and can make a lump sum payment.

Declaring Bankruptcy

Debts got you totally in over your head? Bankruptcy clears your debts and gives you a fresh start. Sudden job loss, health problems, failed marriage — as long as you aren’t just trying to frustrate creditors, you may qualify. When you can’t make your payments or pay your debts by selling all your assets, you’re insolvent. 

Bankruptcy means you are no longer responsible for most debts, although it will stay on your credit report for up to seven years or 14 years for a second bankruptcy. Creditors won’t be able to sue, garnishee wages or harass you to collect. Your bankruptcy trustee may take possessions they can sell and will have you keep detailed income and expense records. 

Debts still owed include:

  • mortgages or homeowner credit lines that secured creditors can seize and sell 
  • alimony and child support
  • court fines or penalties
  • fraud-related debts
  • and most student loans. 

It takes time to heal your credit record and get loans or credit cards after bankruptcy. The relief you feel may be worth it.

Getting Advice on Your Options

If you’re torn about what to do, a debt consultant can review your situation and suggest options. You pay for their services, so ask about fees and get references before you sign anything. Now that was easier than being in debt forever.

Disclose Your Finances in Ontario Divorce Court

Let Axess Law’s Ontario family lawyers advise you on disclosing debts and assets for family court. We video conference online with you anywhere in Ontario, 7 days a week. Day or evening appointments can be made by calling 1-877-522-9377 or in Greater Toronto 647-479-0118 or use our online booking form. Our experienced family lawyers can meet with you in person at our Ottawa, Toronto, Scarborough, Vaughan, Etobicoke, Mississauga Winston Churchill or Mississauga Heartland law offices. 

Click here to learn more about Axess Law’s family law services.

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