Debt is not so Simple Stupid

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By Margaret H. Johnson

Now let me clarify the title right away. It‘s a pun, my friends, a play on, “Keep it Simple Stupid”. Because, there is nothing simple about debt. People and governments keep underestimating its complexity.

For example, the recent amendments to the Statute of Limitations that reduce the period of time to collect a debt from 6 years to 2 years in British Columbia sounds progressive. Only give the creditor 2 years to catch the debtor or you’re out of luck. Right?

And, for many reasons, this legislation is progressive. 6 years is a long, long time. This allowed creditors to sit and wait for 5 years and 11 months to sue a debtor and get a judgement that would give them another 10 years – or revive the debt for another 6 year period if the debtor made a $1.00 payment or acknowledged they owed the money. Now, we’re up to 12 – 16 years to collect a debt.

That said, strata councils throughout the province now face a brand new problem in British Columbia because they only have 2 years to collect their fines and debts. Strata councils are not a conventional creditor but rather a democratically elected non-profit body that represent home owners. They manage the properties for hundreds of thousands of individuals and families and enforce bylaws against offenders – violators and miscreants. In the past the strata councils could wait until the home was sold, often several years later, where the home owner ignored collection notices. Now, it looks like they must sue the offenders before the two year period is up and secure a judgement.

No doubt this is an oversight by legislators unless they want to see the courts get busier than ever – which, by the way, is contrary to public policy. It has long been an accepted principle that courts are very expensive and that the taxpayer is better served to divert cases out of court.

A similar thing has happened next door in the family court system. The recent amendments to the Family Relations Act (March 2013) that declares spouses automatically owe 50% of the family debt is a simplistic approach to debt that will cause considerable trouble for separating families and undoubtedly result in increased litigation. In theory it sounds good – and intended to rectify many financial abuses of the past but debt is not so simple. Debt is a complex legal relationship – sometimes understood by both spouses, sometimes used as a mechanism of deceit to conceal affairs, gambling issues or business failings or sometimes agreed to by both spouses.

With the exception of taxes and family maintenance, debt is a contract between a borrower (debtor) and a creditor. It can be verbal or in writing. It can involve conventional creditors, leases, third parties, friends and family members. If both spouses have not consented to the credit contract, then this should alter the definition of a family debt.

Tax liabilities enter the debt stage as small businesses on occasion do not file their tax returns promptly or keep proper records. Meanwhile, the spouse is often unaware of such a contingent liability – which can be substantial and potentially end in a bankruptcy.

Some bankruptcy trustees see the new family law that splits the family debt 50-50 as a nuclear bomb for marital breakdown and family separation. If you should separate and your spouse goes bankrupt then 50% of the family assets automatically vest (are transferred) to the trustee in bankruptcy. If there is no separation agreement or court order, then, in an instant, the accumulated wealth of the family is diverted away from the facts of the situation – the good and the bad – and into the lap of a party that represents creditor interests and not that of the family.

According to some experts part of the problem lies with the provision that makes each spouse bear equal responsibility for ‘family debt’ on the date of the separation.

s. 81(b) of the Family Relations Act states, “on separation, each spouse has a right to an undivided half interest in all family property as a tenant in common, and is equally responsibility for family debt.”

s. 81(a) goes further – “Spouses are both entitled to family property and responsible for family debt, regardless of their respective use or contribution.”

At first glance this seems to ignore the purpose or reason the debt was incurred in a family. Moreover, it over simplifies the marital relationship itself. Why do you think all of the assets may be put in one spouse’s name, and likewise all of the debt? Historically this was done for business purposes – legitimately protect family assets from creditors.

The family debt provisions also seems to ignore the rights of spouses to make decisions about money. The new law makes all the family debt joint liabilities when, for example, spouses might separate the debt obligations because they do not want to assume the liability of the other spouse – if something should go wrong with the marital relationship or indeed a bankruptcy ensue.

It is worth mentioning, the creditor can only pursue the spouse who signed the credit contract – so, the family court may deem the debt ‘joint’ but the creditor can only legally pursue the debtor signed on the contract. What this means is that, in situations where most of the family debt is in one spouse’s name, the other spouse cannot be sued or garnisheed. Just the person on the contract.

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