Ever wonder what role debt has in your divorce? What are the implications of debt on the division of assets or support payable? Can debt work in your favor? This post will provide some insight on how debt factors into essential aspects of your divorce such as the division of property.
In Ontario property is divided by equalizing the net worth acquired during marriage. This is referred to as equalization of the net family property. The net family property is calculated by subtracting the value of property at the time of marriage from the value of property at the time of separation. The spouse with the higher total must pay the spouse with the lower total half of the difference of their net family properties. So how does debt come into play? In calculating the net family property you are entitled to deduct any debts or liabilities existing at the time of separation from the total value of your property. In order to be allowed such a deduction, the court must be satisfied that an alleged debt is real.
Alternatively, it is possible for a negative deduction to be made (an addition) when calculating pre-marital property if one spouse has only debts at the time of marriage. If someone enters a marriage with a $200K debt, pays it off throughout the marriage, and on the date of separation has $200K in assets, how much wealth did they accumulate? In such a scenario, the $200K debt that was paid off is actually considered an accumulation of wealth, making their final net family property $400K. In other words, if you pay off your debt which existed at date of marriage by the date of separation, the amount paid off must be added to your asset pile. The formula for equalization is essentially determining how much wealth was accumulated during the marriage.
It is important to note that there are some instances in which a court may award a spouse more or less than half of the difference between the net family properties if doing otherwise would be unfair. One of such instances is when a spouse fails to disclose to the other their debts or liabilities existing at the date of marriage. Failing to disclose material debt can also be a basis on which a court may set aside a domestic contract which provides particular arrangements for the division of property. Another circumstance in which a court may award unequal division is when debts claimed in reduction of a spouse’s net family property were incurred recklessly or in bad faith. In such instances the courts will not allow intentional, reckless or bad faith conduct to reduce a spouse’s equalization entitlement. Yet another scenario is when one spouse has incurred a disproportionally larger amount of debt than the other in order to support the family. In these cases the courts may recognize the disproportionate contributions made between two spouses.
Debts may also play a role when it comes to determining support payments. A spouse who has an unusually high level of debts that were reasonably incurred to support their spouse and children prior to separation, or to earn a living, may be permitted to pay less than the standard amount of spousal support required for their income level as it would cause undue hardship.
It is clear that debt has significant implications on the division of property. At the end of the day, debt may work for or against you when it comes to equalization or support payments. The important thing to remember is that although debt can reduce an amount payable, the courts have the power to vary an equalization share or support amount and will do so when a party acts in bad faith.
The above information is not legal advice of any kind, and you should be sure to speak to a qualified family law lawyer about your specific situation. For more information, call us at 905-273-4588 or email us at email@example.com to book a free 30 minute consultation with one of our experienced family law lawyers.