Almost one in five insolvencies in Canada (a bankruptcy or consumer proposal) involves someone who has experienced a marital or relationship breakdown. Often the financial problems occurred long before the divorce. Financial pressures often increase after divorce as two households are now trying to live on the same income as one household did before the separation. When these problems become severe enough to lead to the insolvency of one or both ex-partners, there are special legal complications when it comes to divorce and bankruptcy that need to be considered.
Alimony and child support
Some insolvent individuals have fallen behind in their alimony and child support payments. It is important to note that alimony and child support payments are not discharged in bankruptcy. However, if you are responsible for child support or alimony and you file for bankruptcy, you can deduct the payments from your income when your licensed insolvency trustee is calculating the cost of bankruptcy. For example, if you make net $3000 a month but owe $800 a month in alimony and child support, you can deduct the payments from your monthly income to lower your net income and reduce or avoid possible surplus income payments, as well as avoid extending the length of your bankruptcy.
How your assets will be affected will depend on what came first: the divorce or the bankruptcy.If your ex files for bankruptcy, and is in arrears of support payments, the spouse who is owed money can file a claim in the bankruptcy like any other creditor and receive dividends from their share of the bankrupt’s estate. Payments that are in arrears for 12 months prior to the date of the bankruptcy are considered a preferred claim, which means that they will be paid before all other creditors. Any alimony or child support that is not paid by the bankrupt estate is still owed by the paying spouse after they are discharged from bankruptcy.
Lastly, any unpaid equalization payments, as a result of a divorce or separation agreement, are treated like unsecured debts and are eliminated in bankruptcy (although this is a complicated area of law, so legal advice should be sought it the amounts are significant).
How your assets will be affected will depend on what came first: the divorce or the bankruptcy. If you divorced or separated first, and your assets were transferred to your spouse because of a legal separation agreement or court order, then those assets will not be affected by your bankruptcy. This assumes the transfer was not fraudulent in any way.
If you’ve filed for bankruptcy first, before any of the separation or divorce proceedings, then your assets will be considered as a part of your bankruptcy estate, and they must be surrendered to the licensed insolvency trustee. How bankruptcy will affect your assets will depend on your province’s exemption rules regarding which assets are exempt from seizure.
Joint and Co-signed Debts
As married couples build their lives together, they often incur joint debts. A joint debt is one where both parties are responsible to repay the loan. Debts are joint simply because you are married. One spouse can have their own credit card or bank loan. Debts become joint if both spouses sign for the debt.
It is important to note that alimony and child support payments are not discharged in bankruptcy. In the event of divorce, it’s commonly believed that the amount owed on joint debts will be split evenly between each spouse. However, that is not the case. Both spouses are 100% liable for joint debts for which they were both responsible before the divorce or separation. That means if one spouse defaults or files for insolvency, creditors will approach the other spouse for the whole amount owed. Filing for bankruptcy will not eliminate your portion of the debt; instead responsibility for that joint debt will shift to your ex. Divorcing does not absolve you or your ex of your financial responsibilities and obligations. Divorce does not protect you or your ex from the effects of insolvency. In fact, if you and your ex have joint or co-signed debts, bankruptcy will have an effect on both of your finances.
The same is true of co-signed debts. If you have co-signed your spouse’s loan and he or she file for insolvency, you’re liable for the total amount owed.
Even if you’re divorced or separated, and you have made a legal separation agreement that says you and your ex will split the debts evenly, you are still responsible for your ex’s debt until it is paid off. The legal agreement you made is between you and your ex, not between you and the lender. Only the lender can release you or your ex from a co-signed loan or joint debts. Even then it is prudent to close the account once it is paid off, or request a letter from the lender stating you have been released from that debt or loan.
If you are divorced, struggling with post-divorce debt or have co-signed loans and joint debts with your ex, speak with a licensed insolvency trustee. They will be able to examine and assess your financial situation, and provide different options for dealing with your debts. They will also explain how your options will affect your ex, and whether one or both ex-partners will need to file for insolvency. If both spouses should file, they can give you a choice to file separately or together in a joint bankruptcy or consumer proposal, depending on which option makes the most sense for you and your ex.