10/27/2013 11:44 EDT | Updated 01/23/2014 06:58 EST

The Ripple Effect of Divorce Debt

Most realize that the impacts of divorce are far reaching and hurt couples on many levels. In addition to the emotional damage, the long term financial health of those separating can be severely impacted as they seek to divide assets and agree upon income support payments. What many may not realize, however, is that this financial damage can lead to debt and financial challenges for not only the individuals separating, but their extended families as well.

This reality was illustrated by a story in the Toronto Star that highlighted problems in the legal aid system in Canada. It told the story of a 44-year-old woman who spent some $41,000 on legal fees in her divorce and custody proceedings "that contributed to her declaring insolvency at the start of the year."

Shockingly, the story revealed how this woman was denied legal aid to continue court proceedings to regain access to her children, as her modest salary of around $40,000 was too much to allow her legal aid representation, even though she had signed an insolvency. She was being forced to represent herself in court, or accept a monetary advance and repayment plan from the court (ie. a new debt), despite already struggling with an insolvency.

Sadly the horrendous financial toll this woman's divorce has resulted in is not that uncommon. Trustees see people weekly who cite a divorce, or separation, as the primary cause of them needing to sign a consumer proposal or personal bankruptcy.

The unfortunate ripple effect of this divorce-induced financial tsunami, however, is not always limited to the separating couple. Quite often, a parent, sibling or extended family member dip into their savings, or take on debt, to help fund the legal expenses associated with their family member's divorce.

This financial support frequently involves retired parents taking out mortgages on paid off homes, or dipping into retirement funds, to support legal fees that can reach six figures in many cases. The financial sums can be staggering and are, of course, utterly unplanned for by all parties involved.

Worse yet, many find themselves in difficult and unexpected situations after they thought they had settled their divorce and agreed to financial terms. This can be the case when a settlement agreement identifies one of the separating individuals as being responsible to pay off a debt that was jointly held.

If that person defaults, the creditors can still come after the other person, regardless of the settlement agreement. The creditors are not part of the settlement agreement and they are free to go after the other party who co-signed the debt obligation. This happens more than you think and trustees often see people facing debts they believed a separation agreement had removed their responsibility to pay.

When this scenario occurs, more often than not a family member intervenes to help the separating individual avoid an insolvency. In combination with legal fees already accumulated and now facing debt demands thought to have already been settled, the family members can find their desire to help comes with significant debt demands of their own. It can be a sad and highly unfortunate situation for all involved.

Of course, when there are young children involved, this point becomes all the more true. The daunting debt burdens can prevent disposable funds from being available to provide the activities of youth, let alone future opportunities like post-secondary education.

When stories like the one reported in the Toronto Star appear it can be easy to see these as rare cases. Sadly, the financial trauma imposed by divorce and separation proceedings is far more significant and common than many believe.

While the story in the Toronto Star suggests the some fundamental reforms are needed to the family law statues, there is no "easy" way to address the debt problems imposed upon separating couple and (all too often) their families.

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