Whose Debt Is It Anyway?

February 6, 2013
Leisha Murphy

Daisy and Eric have decided to separate. They agree to equally divide their assets, but Daisy does not want to pay for half of the Line of Credit which Eric used (without Daisy knowing) to go to Vegas (without Daisy), buy new skis, and purchase a new Mercedes after the parties separated.

Eric thinks Daisy should pay for half the line of credit.

If this situation sounds familiar, you are not alone. This is a common question spouses struggle with during separation.

Debt under the Family Relations Act

Under the current Family Relations Act, family debt is not defined.  In the scenario above, because Eric is alleging he and Daisy have a joint responsibility for the Line of Credit, he has the responsibility of proving that the Line of Credit debt was incurred for a family purpose. In other words, Eric has the responsibility of proving the debt should be shared.

To determine whether the Line of Credit debt was incurred for a family purpose, the following questions may assist:

  1. Did both Daisy and Eric benefit from incurring the debt or from the dilatory payment of the debt either before or after separation?
  2. When the debt was incurred, who did Daisy and Eric intend to be responsible for it?
  3. When was the debt incurred?
  4. With regard to income tax liability, when was the income received that resulted in the tax liability being incurred?

To prove to the Court that the Line of Credit was used for a family purpose, Eric would be required to provide the Court with an accounting, to the extent possible, of records and his recollection of the total cash flow through his hands for the particular year(s) under scrutiny.  As a matter of common sense, however, Eric will enjoy the benefit of the doubt when there is no evidence and no suggestion that any of the cash flow found its way into a non-family purpose (Mallen v. Mallen, 1992 CanLII 4034 (BCCA)).

In the case of Daisy and Eric, Daisy did not benefit from Eric incurring the debt. Since Daisy did not know Eric incurred the debt, it can be assumed that it was intended that Eric would be responsible for the debt. While the trip to Vegas and the skis were purchased during the marriage, the Mercedes was purchased after separation, which makes it more likely that Eric will be on the hook for that purchase. If the trip to Vegas and the skis were purchased close to separation, this will also weigh in favour of Eric being responsible for the debt. However, if these items were purchased at the beginning of the marriage, this may weigh in favour of the debt being shared. Ultimately, whether debt will be shared between the parties or the sole responsibility of Eric is an exercise of discretion by the Courts.

Debt under the new Family Law Act

Under the new Family Law Act, coming into force in March 2013, family debt is defined under s. 86 as follows:

Family debt includes all financial obligations incurred by a spouse

a)      during the period beginning when the relationship between the spouses begins and ending when the spouses separate, and

b)      after the date of separation if incurred for the purpose of maintaining family property.

Under s. 81 of the Family Law Act, spouses are both responsible for family debt, regardless of their respective use or contribution.  It is only under s. 95 of the Family Law Act where the Court may order an unequal division of family property or family debt, or both, if it would be significantly unfair to equally divide the family debt.

Under the new Family Law Act, the responsibility to prove the debt should not be shared would shift to Daisy. As a result, Daisy would have to show that dividing the Line of Credit would be significantly unfair to her.  Whereas, under the current Family Relations Act, it is Eric who has the onus of proving that the family debt should be equally shared between the parties.

Leisha Murphy
Leisha Murphy
Partner (Vancouver)
Connect Family Law

Leisha takes a heart-forward approach to her practice. Providing clients with guidance and education, she takes a “big picture” view , assessing the long-term impacts of decisions to ensure the best possible outcome for you and your family.