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How does bankruptcy affect divorce?

Region: Ontario Answer # 0269

Filing for bankruptcy can become very complicated if someone is going through a separation or divorce and files for bankruptcy at the same time, and involves many decisions that will affect you now and in the future. To get help, ask a lawyer now.

There are two main concerns:

  • What happens to joint debts?
  • What happens to personal assets?

Who is responsible for joint debt when separating or divorcing?

Both spouses are still responsible for any shared responsibilities such as joint credit cards and loans that still exist at the time of separation or divorce.

It does not matter if one spouse did not contribute to the debt during the marriage, for example if both names are on a credit card but only one person used it, that spouse is still responsible for the debt.

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What happens to joint debt if you file for bankruptcy?

Therefore, if one person declares bankruptcy, the other person in the relationship will have to continue making full payments on any joint debt remaining. If you file for bankruptcy to eliminate your debts, your creditors can go after your ex-spouse for the full amount of any joint debts you had while together.

What can you do to avoid this?

Although a joint debt cannot be eliminated by a divorce or separation agreement, there are options available for dealing with the joint debt a spouse may be responsible for when the other spouse files for bankruptcy:

  1. Ask the bank or lender to remove one spouse from any debt they co-signed or guaranteed. This includes joint credit cards.
  1. Ask your bank or lender to split the joint debt into two new loans, one in each of your names.
  1. If your lender is unwilling to do either of these things, or neither you nor your ex-spouse can afford to repay the debts, then:

– the spouse left with the debt can file for bankruptcy

– the spouse left with the debt can file a consumer proposal

– both spouses (either separated or divorced) can file a joint bankruptcy or joint consumer proposal

  1. If you have a joint secured asset, such as a car or home, you may be able to make arrangements with your creditors to keep the asset if you are able to afford the payments. If you cannot afford the payments or would like to surrender the equity you have in the secured asset, it will have to be sold.

What happens to spousal and child support payments during bankruptcy?

Under the Bankruptcy & Insolvency Act, bankruptcy will eliminate most of your unsecured debts but will not eliminate spousal support or child support payments.

Spouse paying spousal or child support:

In most cases, if the terms of the divorce or separation agreement agree to give one spouse certain assets in return for continuing to make support payments, and the paying spouse then files for bankruptcy, they will lose the assets. Spousal and child support payments, however, still have to be made.

Spouse receiving support or alimony:

Spouses owed back support payments can make a claim in their ex-spouse’s bankruptcy and receive a share of any ‘dividend’ paid from the estate. Any alimony or support arrears for the 12-month period before the date of bankruptcy are considered a preferred claim and are paid out of the proceeds of the bankrupt before any other unsecured claims.

Any support amounts left unpaid are still owed by the paying spouse as those payments survive bankruptcy.

Equalization payments

Equalization payments are amounts that the spouse with the higher total asset value has to pay the spouse with the lower total. As the name suggests, the purpose of an equalization payment is to put both spouses in an equal position, in that both spouses end up owning the same total value of property.

In bankruptcy proceedings equalization payments are treated like all other unsecured debt and are eliminated by filing bankruptcy.

What happens to personal assets if you file for bankruptcy while getting a divorce?

What happens to unsecured assets in the case of both a bankruptcy and divorce, depends on which process occurs first, and who has rights to the assets at that time. 

If bankruptcy first:

If someone files for bankruptcy first, their assets are transferred to their bankruptcy estate and are no longer available for distribution to their ex-spouse.

If separation or divorce first:

If assets are transferred to an ex-spouse as part of as part of the divorce agreement or legal separation agreement before the person files for bankruptcy (assuming not done fraudulently) then those assets are no longer available to creditors in the bankruptcy.

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Filing for bankruptcy is a serious and complex process that involves many decisions that will affect you now and in the future. To get help, ask a lawyer now.

When you are in a situation of financial difficulty, there are many options to consider before filing for bankruptcy. For easy-to-understand debt solutions on your terms, contact our preferred experts 4Pillars and rebuild your financial future. With 60 locations across Canada, they will help you design a debt repayment plan and guide you with compassionate advice. No judgment. For help, visit 4Pillars or call toll-free 1-844-888-0442 .

4Pillars Credit & Debt All Provinces All Topics March 19, 20184Pillars Credit & Debt All Provinces All Topics March 19, 2018

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