Joint finances after separation can be misused and in today’s blog, Tal Wolf explains the pitfalls you want to avoid. Vancouver post-separation financial planning and investment protection involves knowing what your marital joint accounts and lines of credit are and taking steps to freeze, close or withdraw monies to protect your share. Restraining orders can be used to ensure only permitted withdrawals will occur. Our family property and debt division lawyers have handled thousands of family cases over the past 35 years.
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Amicable separations are laudable, especially when children are involved. They also result in the majority of cases where separated couples choose to continue living together in the former matrimonial home for the sake of convenience, finances, and to facilitate a continuous parenting regime for the kids. Whatever the underlying circumstances, friendly or “low conflict” separations also, naturally, represent the majority of separations where the parties delay – often for years – the clear-cut separation of their finances. Normally, this would include the splitting of joint accounts and the shuttering of joint debt facilities such as credit cards and lines of credit. But what happens when parties continue their Joint finances after separation?
Joint Finances After Separation Can Result In More Family Property
Be warned, however, of hidden dangers when you continue maintaining joint finances after supposedly being “separated”: Property purchased with joint lines of credit, especially lines that are secured against family assets such as your typical Home Equity Line, may still be considered “Family Property” divisible under Part 5 of the BC Family Law Act even where the purchase is long after separation and in one spouse’s sole name. Using one family property or its equity to buy a new property will make the new property family property.
The recent K.P.B. v. K.E. 2019 BCCA 152 opinion handed down by the British Columbia Court of Appeals, is illustrative. The parties were married in 2003 and separated in 2015. They had a joint line of credit that was secured by a collateral mortgage registered against the title of the Family Residence. At the date of separation, the line of credit had a zero balance. At the date of trial, the appraised value of the Family Residence was $480,000.
Unilateral Action By Husband Backfires
Joint finances after separation can involve debt taking out to buy a new residence for one of the parties which is what happened in KPB v KE. Before moving out of the Family Residence, the husband unilaterally withdrew $25,000 from the line of credit for a deposit on a new home situated a few doors down from the Family Residence (let’s call it the “New Residence”). He purchased the New Residence for $331,581, which he registered in his name alone. He then unilaterally withdrew a further $95,437, bringing the debt on the joint line of credit to $120,437. He used those monies to complete the purchase of the New Residence. Subsequently, he obtained a mortgage of $211,151, which was registered against the title of the New Residence. The appraised value of the New Residence at the date of the trial was $490,000.
The husband did not consult with or obtain the wife’s consent to these Joint finances after separation transactions. The record suggested that she may have been in Japan visiting with family when most of them transpired.
The three-judge panel opined:
37 In my respectful view, the judge erred in not first determining what was family property pursuant to s. 84(1)(a) and (b), and only thereafter determining what debt was family debt pursuant to s. 86(a) and (b). The statutory scheme directs this approach. After determining that the $193,792 was not family debt, the judge then reasoned that whatever was acquired by the husband with those monies was not family property. Had the correct approach been followed, in my opinion the result would have been different.
38 The definition of “family property” in s. 84(1)(b)(i) and the definition of “family debt” in s. 86(b) are not tied together. Each requires a different inquiry. Only where both are established does s. 81 of the FLA direct an equal sharing of family property and family debt. This is typically achieved by deducting family debt from the family property to arrive at a net value for family property.
39 In this case, the Family Residence and the New Residence were interconnected assets because the latter was acquired by effectively “withdrawing” $120,437 of equity from the Family Residence.
An important feature of this case was that the husband had created a substantial liability for the wife without her knowledge or consent. The thought he was “entitled” to do so, on the basis that somehow he was only withdrawing his half interest in the Family Residence. But the Court of Appeals disagreed. The parties had an undivided half interest in the Family Residence. The effect of the husband’s withdrawals from the joint line of credit not only created a (joint) liability for the wife but also encumbered the otherwise unencumbered residence with the collateral mortgage. Moreover, the husband’s actions exposed the wife to the potential risk of foreclosure with respect to the Family Residence if there were any default in payments due on the joint line of credit. Further, the husband’s liability was secured only by the collateral mortgage on the Family Residence; his New Residence was not subject to foreclosure for the joint line of credit debt.
Ultimately, the Court insisted this was an arrangement that required the full participation and consent of the wife as it involved increasing her financial exposure in a way that might affect her ability to retain the home if the husband were to become incapacitated or otherwise failed to pay the debt. The wife was assigned a proportionate interest as family property in the New Residence as that interest was derived after separation in part from the equity in the Family Residence that was owned by both parties.
42 The value of the wife’s proportionate interest in the New Residence equates only to that portion of the New Residence purchased with the $120,437 from the joint line of credit: that interest is 36% ($120,437 ÷ $331,581). Therefore, she has a right to one-half of that interest or 18% of the appraised value of the New Residence. Based on the appraised value of $490,000, the wife’s 18% interest amounts to $88,200.
Find Out How To Protect Yourself after Separation
Amicable separations are a good thing in principle, but how you go about (or don’t go about) arranging your joint finances after separation can cause far-reaching and unanticipated consequences when you finalize matters in a court of law. Don’t wait for months or years after “separating” to talk to a lawyer. As soon as you and your spouse call it quits – even if you continue living together – the BC family property and separation financial planning lawyers at MacLean law are ready to advise you on protecting your assets and investments in the post-separation world.