Many couples are getting married with a significant amount of debt. One or both partners might have student loans, credit card debt, a line of credit, an auto loan, or a mortgage.
In 2014, Harris/Decima conducted a poll that showed two in five Canadian newlyweds enter their marriages with debt and owe, on average, $21,500. So, what happens to this debt when you tie the knot or become common law partners? And what happens to debt that you accumulate during your marriage?
The good news is that you won't be held liable for any pre-existing debt that your partner brings with them to the marriage or partnership. Unless you co-signed for the loan or credit card, pre-existing debt is seen as entirely your partner’s responsibility.
Student loan debt
Student loan debt remains the responsibility of the borrower even after you’re married, but marriage or common law status might affect the repayment of your student loans and your ability to take out new student loans.
If one or both partners are applying for repayment assistance, their spouse or common-law partner’s income must be reported. This income will be factored into the payment calculation and will likely increase the borrower’s monthly payment.
A spouse or common-law spouse’s income must also be reported if one spouse is returning to school and is applying for new student loans. This can often make a student ineligible for student loans. Many people don’t realize that when it comes to Canada Student Loans, it’s the federal definition of common law that applies. Federal law considers couples who have lived together for one year to be spouses.
This is different than the provinces and territories that generally only consider a couple common law if they’ve lived together for two years or live together for one year and have a child together.
What if your spouse dies?
If your spouse dies with debt that is still unpaid, you aren’t responsible for that debt unless you were a co-signer on it. However, that debt could impact your finances significantly since the lender will seek to get repaid through the borrower’s estate.
Lenders are paid by the estate first before the money and assets pass to the spouse. That means that if you co-own a home with your spouse, the lender could seek to be repaid via your spouse’s share of the equity or half of any other assets you jointly own.
Be careful about being added or adding a spouse as a cardholder
If your partner doesn’t have great credit, don’t let them add you as a cardholder on any of their accounts.
While it might seem easier to manage your bills with one credit card, their account will be added to your credit report when you’re added as an authorized user. That means if they haven’t used the account responsibly, it could affect your credit score.
On the flip side, if they have been responsible with the account and have a good credit score this could potentially boost your credit score.
If you have a good credit score and want to help your partner improve theirs, it might make sense to add them as an authorized user on one of your credit cards. However, you should not do this if you don’t trust that they can use the card responsibly.
You will be solely responsible for any debt that they accumulate while using this card and if you can’t pay off their purchases right away, this could impact your credit rating.
Joint credit cards
The benefit of using a joint or co-signed credit card account instead of adding your spouse as an authorized user is that they are liable for half of the charges on a joint account whereas only the original borrower is liable on a card with an authorized user. However, if one spouse has bad credit, taking out a joint credit card can greatly increase the interest rate.
Mortgages and credit scores
It's important before you get married that you talk to your partner about your credit scores.
If you're hoping to purchase a house and one of you has bad credit, this will greatly impact your ability to get a mortgage and your mortgage rate. If you or your partner have a low credit score, then you might not be able to get a mortgage by applying together.
That means that one of you would have to apply for the mortgage alone using only the sole applicant’s income to determine how much large of a mortgage you qualify for. Even if the partner with a bad credit score is approved by the bank as a joint borrower, their low credit score might greatly increase the interest rate the bank charges on the mortgage and therefore increase the monthly payment.
This might mean that you won’t be able to afford to buy a home until you or your partner improves your credit score or one of you will have to apply for the mortgage on your own.
Before you get married, it's important that you talk to your partner about debt.
Find out how much they currently owe and tell them how much you owe. It's also essential to talk about your attitudes towards taking on different kinds of debt and paying off different kinds of debt.
If one of you believe that you should avoid credit card debt entirely and the other partner believes that credit card that is just a part of life then you might have to carefully navigate how you assume debt during your married life.