It is not uncommon for parties to enter into a marriage or a common law relationship with individual debts in the form of mortgages, student loans, credit card debts, etc. In addition, the parties may incur new debt during the course of the relationship, either separately or in joint names. If the relationship breaks down and the parties are faced with dividing their family property, what role do these debts play?
The Family Property Act, RSA 2000, c M-8 does not specifically address debts and liabilities. Therefore, there is no one way of dealing with debt. The Court may exercise its discretion in regards to this issue. In practice it is common to factor in the amount owing in family debt when dividing family property. Section 7 of the Family Property Act provides for the division of “family property”. The Court and parties often proceed on the assumption that this means “net family property”. This is a logical approach as failing to factor in liabilities could lead to inequitable results. For example, if one person received half of the family assets but also all of the debt because it was taken on in their sole name even though both parties benefited from the debt during the relationship.
The Family Property Act stipulates that the Court must consider property that is brought into the marriage or relationship pursuant to section 8. Subject to certain qualifications, the property brought into the relationship by each party is considered to be “exempt” from division. However, a party is not entitled to credit for an exempt asset which has been consumed or dissipated throughout the relationship. For example, if one party received an inheritance and then used the inheritance funds to go on a lavish vacation, they do not receive a credit for that amount when it comes time to divide family property. Those funds no longer exist. The same approach can apply to pre-family debt. Generally, if the debt is paid off in the ordinary course during the marriage or relationship, it may no longer be a factor in any subsequent family property division. This idea can be illustrated with the example of student loans. If one spouse brings a student loan into the marriage and the student loan is slowly paid off during the course of the marriage then, upon separation, the other party is not entitled to a credit even if they assisted with making the payments. If pre-family debt is paid off during the marriage or relationship, it does not linger as an obligation of the party who brought it into the marriage.
Applying the foregoing principle is less straightforward when dealing with “revolving” debt, for example a credit card. If one party came into the relationship with credit card debt (which was paid off during the relationship but subsequently built up again over time) does that pre-relationship debt get factored into the division of property? As a general rule, where payments on a revolving debt are made after marriage or the relationship, it should be assumed that those payments are applied to the oldest balance first on a “first in first out” basis. The new obligations on the revolving debt incurred during the marriage or relationship should be regarded as being expenditures made in the ordinary course of the marriage or relationship, and any new balance is therefore family debt.
If you require assistance with debt and family property division, contact the Calgary Family Law Lawyers at SVR Family Law.