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Negotiating credit for homo couples

How debt, bad credit can creep into your relationship

Fred and Frank have been friends since 2001.

At the time, the two Ottawa gay men were in relationships with other people. Fred was engaged (and later got married) and Frank was living common-law with another man. Eventually, both split from their partners.

Frank, 28, never married his partner and was lucky to leave him amicably.

Fred, 37, had a nasty divorce. Because Fred wants nothing to do with his ex, they both wish to keep their last names out of this story.

In 2006, Fred and Frank began dating and moved in a month later. They learned valuable lessons from their previous relationships and are now happily independent, financially speaking.

That is, they pay for things equally — and keep personal money separate. They don’t own property together, and they don’t have joint bank accounts. They decided common-law was the best option for them, foregoing marriage.

“Marriage is a crock,” says Fred, adding he never plans to get married again.

According to Statistics Canada, Ottawa boasts 2,415 same-sex couples: 380 are married and 2,035 are common law. Behind Toronto and Vancouver, we have the third highest population of state-recognized same-sex coupling in Canada.

But when those relationships end, the result can be a battle over who owes what. And a bad credit score can be the unhappy parting gift of a failed relationship.

Fred’s feelings towards his ex are bittersweet, but he feels fortunate to have a high-paying government job and responsible spending habits. His personal credit wasn’t destroyed — but only because he was able to pay the bills his ex left behind.

It doesn’t have to be that way. If a person has debt before their union is certified by law, the debt remains theirs until they pay it off. Their partner is not responsible for and cannot be affected by that debt.

Moreover, credit is individual. The only time someone’s personal credit is affected by their partner’s actions is when people co-sign for lines of credit or mortgages.

“Unless you buy things jointly, lenders look at the credit rating of both people. Then they look at the credit rating of the higher income earning individual,” says mortgage agent George Hartsgrove of Mortgage Alliance.

Each person has an individual credit rating. Let’s say Jen and Rita get married and want to buy a house together. Jen makes $150,000 a year and declared bankruptcy last year. Rita makes $75,000 a year and her credit rating is excellent. In order to be approved for a mortgage (or not pay a ridiculously high interest rate), their application would only be based on Rita’s income. Jen would exclude herself from the mortgage because her credit is shot. If they split, Rita is accountable for that mortgage.

Let’s change the scenario. Let’s say Kim and Joanne are university students and they move in together. Kim has an excellent credit rating and Joanne has never had credit. If Joanne wants Kim’s credit rating to rub off on her, Kim can apply for “responsible party” status and extend a joint credit to Joanne, such as credit cards. This effort can also increase Joanne’s credit rating if she’s got bad credit.

But before people move in together, they should understand the difference between common-law partnership and marriage, says family lawyer Caspar Van Baal of Mann and Partners, LLP.

“Part One of Ontario’s Family Law Act does not apply to common-law partners. That means there is no equalization of matrimonial property. If you’re common-law and you want to equally divide property [and debt] you acquired [during the partnership], you can do that. But there is no regime or requirement to do so,” says Van Baal.

If your partner left you with a debt less than $10,000, you can sue her in small claims court. But if it exceeds $10,000, you might want to hire a lawyer. That’s an expensive process which you’ll have to think about, but the law doesn’t require you to have counsel.

Following their separation, Fred’s partner left a $15,000 tab from a therapeutic shopping spree on a credit card that Fred co-signed for, cracked up Fred’s car, and refused to pay for anything.

That threatened to ruin his credit score, so he ponied up the cash.

“It would’ve cost me at least $25,000 to get back the $15,000. It wasn’t worth it,” says Fred. “I just wanted to leave. I chalked it up to a learning experience and paid.”

When it comes to credit and its protection, there is a legal difference between common-law partnerships and marriages. In common-law relationships, debt incurred by one spouse remains their own debt in the event of separation. The common-law spouse who incurred the debt cannot say to his unmarried partner, “You owe me for half of this because we acquired this during our relationship.”

In a marriage breakdown, debt is divided equally in the same manner as property through a process called equalization of net family property.

One more example. John and Robert get married. During their marriage, John incurs a $50,000 debt from his own line of credit. When they separate, John can put that debt on his liability sheet and include it in the equalization of their matrimonial assets. In other words, John’s net worth can be reduced by that debt. So Robert shares that debt, even though the debt is in John’s name. Robert doesn’t have to pay money, but he loses out on $25,000 in assets he might otherwise have been entitled to.

“In this case, the debt is payable by John because the line of credit is in his name. His credit rating may be affected. Robert is not affected by John’s debt, until there is a court judgement requiring Robert to pay John an equalization payment,” says Van Baal.

If all of this sounds complicated, it is. Most people recommend contacting a lawyer before entering a marriage or common-law partnership.