So when is a debt not a debt? Is it possible for a debt to be treated like it is an asset? The short answer is yes. And here is how…
Whether you have an outstanding loan or postsecondary school debts; unpaid credit card debts or payments on a car that you bought, in the context of marriage, debt is not always what it seems.
It is important to understand how debt is treated when you get married and what happens when you separate.
How Does This Work?
Let’s look at a potential example:
To keep things simple, let’s assume that when they separate, perhaps Kelly and Lana have amassed $600,000 in joint assets less their joint debts.
Kelly, who studied hard to become an accountant, entered the marriage with a whopping school debt in the amount of $100,000. Lana entered the marriage debt-free. During the course of their 10-year marriage, Kelly’s debt was paid in full. Because this debt existed in the date of marriage, it is included in the calculation of Kelly’s net worth when it comes to dividing their assets and debts. This means it gets deducted from Kelly’s net worth. And what happens when you subtract a debt? Well, it actually becomes a net positive on the balance sheet!
What Does the Law Say?
The application of the Family Law Act leads to the following:
Kelly: $300,000 – (-$100,000) = $400,000
According to this calculation, the difference between Kelly’s net worth and Lana’s net worth is $100,000, so to make things even, Kelly would have to pay Lana $50,000 and they would both leave the relationship with $350,000. And, yet, Kelly does not really have a $100,000 to divide.
How Can a Prenuptial Agreement Help?
A prenuptial agreement is a written agreement that couples make typically before they get married (although it is always possible to create one after the marriage has occurred). These agreements usually set out what each wishes to preserve or exclude from dividing in the event that they ever separate. Kelly and Lana could have agreed in advance that Kelly’s debt would not be included when calculating her net worth. The process is simple, affordable, and efficient and will help you avoid legal fees and stress down the road. Choosing the right Toronto divorce lawyers to assist is essential
Let our team help you
Choosing the right professionals to assist is essential. At Musson Law, our experienced team can help you. Our dedicated legal professionals can help guide you regarding various family law issues and help ensure you have a comprehensive agreement in place.
This information is not legal advice. If you need legal advice, please contact our offices at (416) 862-0980 (Toronto Offices) or (519) 840-0863 (Waterloo Region Offices) or one of the many excellent family lawyers in Ontario.