How to Get Out of Debt After Divorce

Divorce is one of the most significant events you can ever face. Along with the emotional stress, divorce often leads to financial challenges.

On average, divorce can cost anywhere from a couple of thousand dollars to upwards of $100,000 for more complicated situations. Given such a high price tag, you might find yourself selling assets or having to take on more debt just to get by. Without a clear plan for addressing these costs, it's easy to feel overwhelmed.

However, by following practical steps, like creating a budget, exploring debt consolidation, and working to improve your credit, it is possible to regain control of your finances. Read on to learn how to manage and eliminate your debt after divorce.

Understanding Your Debt Post-Divorce

• Individual vs. Joint Debts

In Canada, individual debts are those you incurred before or during the marriage under your name alone. These debts remain your responsibility after a divorce. Joint debts or marital debts are shared debts incurred during the marriage—like joint credit cards or loans—that both spouses are legally responsible for.

How joint debts are split depends on your divorce settlement, any separation agreements, or a court decision if you can’t reach an agreement. Here’s how responsibility is typically determined:

• Divorce Settlement: If you and your ex can agree on how to divide your debts, this will be outlined in the divorce settlement. For example, one person may agree to take responsibility for certain joint debts in exchange for other assets (like property).

• Separation Agreement: If you had a separation agreement in place before or during the divorce process, it should clearly outline who will be responsible for specific debts.

• Court Decision: If you can’t agree, the court will intervene and divide the debts based on several factors, including each spouse’s ability to pay, the amount of debt, and assets acquired during the marriage.

• Legal Implications

Debt division during a divorce is generally based on the principle of equitable distribution—meaning debts (like assets) are divided fairly, but not necessarily equally. Courts will consider the circumstances of each spouse when dividing debts, including income, ability to pay, and the nature of the debts.

Even if your divorce agreement assigns a debt to your ex-spouse, creditors still hold both of you responsible for joint debts. If your ex doesn’t pay, you could be stuck with the full amount. That’s why legal agreements are crucial—they clearly define each person’s obligations and can protect you from future disputes or issues with creditors.

Creating a Post-Divorce Budget

• Assessing Your Financial Situation

To create a budget post-divorce, you’ll want to start by making a list of your income and expenses. This will help you track where your money goes and identify areas where you can cut back to ensure you establish a realistic spending plan while meeting your debt obligations. 

You’ll also want to categorize your expenses. Non-discretionary spending includes your essentials, like housing, groceries, child support, and transportation. Discretionary spending covers things like dining out, entertainment, and shopping—expenses you can cut back on if needed. By focusing on the essentials and being mindful of your discretionary spending, you can create a budget that ensures financial security as you move forward.

• Developing a Realistic Budget

It’s no secret divorce can be expensive, so it’s crucial to stay on top of your finances to avoid missed payments and align your spending behaviours with your new financial reality. 

You can use a budgeting tool, such as Credit Canada’s free Budget Planner, an app, or a simple spreadsheet to make the process easier. Determine how much money you have to spend each month and compare it with how much you pay for various bills and items during that same period. Be sure to account for any debts in your expenses.

• Prioritizing Debt Repayments

Getting your finances back on track means prioritizing your debt. Pay down what you owe by putting the most money towards your unsecured debts first, such as payday loans, credit cards or personal loans, as these tend to have the highest interest rates. 

Instead of making irregular payments towards various debts, use either the Avalanche or the Snowball repayment method. The Avalanche method focuses on paying off your debt with the highest interest rate first. By prioritizing high-interest debt, you save money in the long run and can pay off your debts more efficiently. The Snowball method has you pay off the smallest debt first, which can provide quick wins and keep you motivated with each debt that gets knocked out. Each method has pros and cons, so pick the one that best fits your financial situation.

Debt Consolidation Options in Canada

• Debt Consolidation Loans

If you're struggling to repay multiple loans and credit card balances, consolidating the debts may be an option. Two common options are debt consolidation loans and Debt Consolidation Programs, each with their own pros and cons.

A debt consolidation loan combines your debts into a single loan with one interest rate. This can be helpful for high-interest debt, like credit cards, but may not be available if you have poor credit or a lot of debt. While it may offer short-term relief, it can also extend the time it takes to pay off what you owe.

A Debt Consolidation Program (DCP) works with a credit counselling agency to simplify your debt payments and reduce interest. A certified Credit Counsellor negotiates with your creditors to lower monthly payments and streamline your unsecured debts. This can lead to faster relief, but you won't be able to access new credit during the program, and your credit score may dip before it improves.

• Debt Consolidation Loans

A consumer proposal is when you work with a Licenced Insolvency Trustee to reach an agreement with your creditors to only pay a portion of the debt owed, or extend the time you have to pay off the debt, or both. Unlike bankruptcy, which can wipe out most of your debts, a consumer proposal allows you to keep your assets while still working to pay off a manageable portion of your debt.

While a consumer proposal can reduce the amount you owe, it will still impact your credit score—though not as severely as bankruptcy. Your credit report will show the proposal for three years after it's paid off, and it can take some time to rebuild your score. However, it’s a good option if you want to avoid losing assets and minimize the damage to your credit in the long run.

Rebuilding Credit After Divorce

• Understanding Credit Scores

A solid credit score is more than just a number—it opens doors to better financial products, saves you money and improves opportunities for renting, car insurance and employment. It’s important to have good credit so you can qualify for products when you need them, and get the best interest rates.

Your credit score is calculated based on the following factors:

• Payment History (35%): This shows how reliable you've been in paying off past and current debts. Missing payments or paying less than the minimum can negatively affect your score.

• Credit Utilization (30%): This refers to how much of your available credit you’re using. Using too much credit can suggest you're overextending yourself, which can lower your score.

• Credit History (15%): A longer credit history shows how well you've managed credit over time, which can help improve your score.

• Diversity of Credit (10%): Having a mix of credit types, like credit cards, loans, and lines of credit, can be beneficial. However, only take on what you can manage, as excessive debt can bring down your score.

• Hard Credit Inquiries (10%): Applying for too much credit can hurt your score, so limit hard credit inquiries.

Divorce itself doesn’t directly affect your credit, but how you and your ex-spouse handle joint accounts and debts can. Missed payments on joint credit cards, loans, or a mortgage, as well as any outstanding balances, can negatively impact both of your scores. Make sure to close joint accounts and continue making payments (even if your ex isn’t) to protect your own credit.

• Steps to Improve Credit

While divorce can have an impact on your credit, there are practical steps you can take to improve it. A history of consistently paying down debts is a good starting point. Make sure you’re paying the minimum amount or more, on time, every time, for all your bills. Focus on paying down your debts with the highest interest rates. Reduce the balances of your credit cards—aim to keep them below 30% of your credit limit to show you can manage credit responsibly. Be sure to also regularly check your credit report for errors that may be affecting your score.

Another option is to use a secured credit card. With this type of card, you make an initial deposit that sets your credit limit, and the bank holds this deposit as a safeguard. Just remember, credit should complement your financial strategy, not replace the money you don’t have, so use it responsibly.

Finding Professional Financial Advice

• Financial Advisors

A financial advisor can assist you in creating a budget, managing debts, and planning for the future. This can be especially helpful post-divorce to help you navigate your new financial reality. They can also help you set clear financial goals and provide personalized strategies to help rebuild your credit and ensure long-term financial health. 

When choosing an advisor, look for one who has experience working with divorced clients. Check for proper credentials, like a Certified Financial Planner (CFP), and ask about their fees upfront to make sure you’re comfortable with the cost. It’s also a good idea to read reviews or ask for recommendations to find someone you trust.

• Legal Assistance

In some cases, legal advice might be necessary after a divorce, especially when it comes to debt disputes or issues dividing assets. A lawyer can help if you're having trouble determining responsibility for debts or if you need help with spousal or child support. In Canada, there are resources like provincial legal aid programs offering low-cost or free services for those who qualify. You can also look for lawyers who offer free consultations to determine if legal advice is needed for your situation.

A Debt-Free Future

• Setting Financial Goals

After a divorce, it’s important to set clear financial goals for both the short-term and long-term. Start by focusing on immediate goals, such as paying down high-interest debts or building an emergency fund. Without your spouse’s income, an emergency fund gives you the financial cushion you need for unexpected expenses, job loss, medical bills or car repairs. Aim to have enough to cover 3-6 months’ worth of living costs.

Once you’ve handled the basics, focus on future goals like saving for retirement or buying a home. Setting these goals helps keep you motivated and provides a sense of control over your finances during a big life transition.

• Maintaining Financial Discipline

To avoid falling back into debt, practice mindful spending and regularly review your finances. Make it a habit to track where your money is going and notice areas where you can cut back. It’s also important to keep educating yourself about personal finance—there are plenty of resources available to help you better understand budgeting, credit, and saving. Staying disciplined and informed will help you create a stable, debt-free future in which you feel in control post-divorce.