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Protect yourself from your partner’s debt
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goldengirlfinance.ca
Over three-quarters (77%) of Canadians say that having a partner who is bad at managing their personal finances or has excessive debt is a marriage deal breaker, according to a TD Canada Trust Poll done earlier this year.
Considering that in 2011, Canadians reached record-breaking levels of household debt (with personal debts consuming up to 40% of the average person's income, according to Statistics Canada), this is hardly surprising.
But love is blind, and since many of us will look past our partner's bank account when we decide to tie the knot, the real question is: How do we protect ourselves so HIS debt doesn't become OUR debt. After all, that happy motto of "what's yours is mine and mine is yours" even applies to money we don't have. [More: You can't live on love alone: Wealth-building tips for couples]
With that in mind, let's consider 3 solutions to keeping both your man and your money...
1)Cohabitation agreements: Because common law doesn't mean common bebt
When you've decided to shack up, a cohabitation agreement provides a detailed outline of each partner's debt, property ownership and support agreements - including all financial and family arrangements, ownership of goods, spousal and child support and the division of property.
Think of it like a worst-case scenario rule book that you implement when the going is good. In essence, it allows you to sit down with your partner and determine who is responsible for what debt and who gets which assets should the relationship end.
In general, if a common-law relationship goes bad and the proper agreements are in place, both parties will keep the personal debts they brought into the relationship and will be responsible for splitting debts incurred after receiving common-law status, if these debts appear to be connected to the relationship. [More: Pre-Nups: Why you need one (and why you don't)]
Sometimes an agreement isn't enough
Regardless of either party's debt prior to the relationship, think of all the things we often do for someone we love ... say, co-signing on a loan to help the other start a business, for example.
You see, things get much trickier when it comes to any joint debt (i.e., shared chequing accounts, credit cards, co-signed loans). These will be the property of BOTH parties regardless of who actually did the spending, even if one person is only the secondary holder.
So while it may have been your ex who racked up the credit-card or line of credit balance on his annual boys' road trip, the collectors will be banging on your door if he's not making the payments. Even more destructive, your credit will suffer along with his, if you don't pony up. The takeaway? Be cautious about co-signing and taking on joint debt. Remember, debt is not a 50/50 split; the onus is 100% on either of you if the other goes running.
And then there's the mortgage ...
Let's say the house was his, and you gave up your apartment to put the rent money towards your newly shared quarters. Makes sense, except that it's now important to keep track of all mortgage payments you make, especially if the property isn't in your name (honey, can I have a rent receipt?). By including this in your cohabitation agreement, it will ensure you're entitled to any gains if the house is sold or if there is concern about who is responsible for the mortgage balance.
Making it legal
Although the cohabitation agreement has to be signed in front of a witness to be legally binding and should be prepared with a lawyer guiding the process, a little incentive might just be that if you do tie the knot, the cohabitation agreement can generally be turned into a marriage contract. [More: 10 tips for talking to your honey about money]
One caveat: this agreement does not take the place of a will - so if something happens to you or your partner, your cohabitation agreement doesn't define the division of assets. Each person must have a separate will and testament for this purpose.
2) Pre-nuptial agreements: Not just for the rich and famous
Even though the aforementioned TD poll indicated that 77% of those Canadians surveyed wouldn't marry someone who was financially irresponsible, only 18% would be willing to sign a pre-nuptial agreement to protect them from their partner's poor financial decisions, including debt brought into the marriage.
And while we know a pre-nup isn't the most romantic gesture, it could very well be the most practical, considering that almost 30% of those polled, who were separated or divorced, said they'd likely consider one in their next relationship.
Here's how a pre-nup works ...
Like a cohabitation agreement, a pre-nuptial agreement outlines who is responsible for the assets and debt if the marriage were to end. Without one, one spouse could be held responsible for the full collection of joint debts if the other goes into bankruptcy.
As such, a pre-nuptial agreement allows you to specify that you don't want to be held responsible for the debt incurred before marriage or for any debt acquired under the other partner's name (i.e. with their own credit card) while you are married. [More: Shacking up is hard to do: Common-law can cost you (how to protect yourself)]
3) You, me and our financial advisor makes three
Despite your best efforts at possible damage control, a pre-nup or cohabitation agreement won't stop the lower combined credit rating, financial stress and bill-paying blowouts which may result when debt and relationships co-mingle - which is why communication about debt and other monetary issues is paramount.
Enter your financial advisor ...
Discussing debt and involving your financial advisor not only opens the lines of communication, but also allows your advisor to look at both sides of your balance sheet to determine how to restructure your finances, build on your assets and consolidate your debts. This balanced approach offers a greater likelihood of increasing your overall net worth - as opposed to just focusing on growing your assets (regardless of your liabilities).
Think of it this way - your advisor is a knowledgeable third party who can help make your debt situation more manageable through education, debt reduction techniques, and planning for the future (i.e. helping you to invest in things like life or critical illness insurance to avoid potentially devastating future debt loads).
Financial advisors will also keep your dollars in a row by scheduling follow-ups and altering their advice based on the markets, changes in your financial health and your life stage.
In short, including a financial advisor in the discussion of your debt is a low-cost, high impact way to lessen the debt trap. Perhaps more surprisingly, they are a largely untapped resource when it comes to dealing with debt; because while many advisors don't charge by the hour for their visits or advice, they have a vested interest in your continued financial health.
Manage the relationship, manage the debt
Managing debt in a relationship is never easy, but through open communication about your finances, you have the best chance of securing that (financially-solvent) fairy tale ending...whether you make it to the altar or not.
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial or legal strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances, as well as fully aware of current laws and regulations.
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