How Joint Debts and Assets are Impacted During a Bankruptcy Proceeding
For better or worse, till debt do you part?
When you get married, and agree to be joined together for life, often the idea of bankruptcy is not at the top of mind.
But if debt starts to spiral out of control, and one spouse finds themselves in the position where bankruptcy is their only option, what happens to the other spouse? And more importantly, what happens to joint debts and assets like the matrimonial home?
When One Spouse Files for Bankruptcy, is the Other Automatically Included?
A common concern for spouses when one partner is considering filing for bankruptcy is how this will affect the other spouse that isn’t filing.
The good news is that, except for jointly owed debts, bankruptcy only involves debts belonging to the spouse that is filing. So, any debts that are owed solely by the spouse that isn’t filing will not be affected.
If your spouse has co-signed or guaranteed any of your debts, they will be fully liable if you file for bankruptcy, and your creditors can pursue them for payment, despite the fact that your bankruptcy eliminates your responsibility to repay the debt.
If you have joint debts for secured debts, such as a house mortgage, or vehicle loan, the non bankrupt spouse will remain responsible to pay these debts.
Supplementary Credit Cards
It’s incredibly common for spouses to have supplementary credit cards – credit cards that have the same account number but are under the name of each spouse.
If your spouse has a supplementary credit card with their name on it, they could be held jointly responsible for any debts that were accumulated using that credit card if you file for bankruptcy. Lenders have different agreements that you and your spouse will have signed. Some hold the secondary card holder liable. Be sure to discuss liability with your spouse and the card issuer.
While bankruptcy eliminates most, if not all, of your debt, it may come at a price.
In exchange for the termination of your debts, your Licensed Insolvency Trustee (“LIT”) must seize and sell certain of your assets if they have equity in them (the estimated net sale proceeds less the debt owed).
This includes jointly owned assets, which means you could potentially lose a jointly owned matrimonial home or vehicle.
However, as with any bankruptcy proceeding, there are certain statutory exemptions. In Ontario, if there is less than $10,000 of equity in your home, you may keep it, as long as you are able to continue making the mortgage payments.
But, if the equity in your home exceeds $10,000, the LIT must recover your joint equity in it, by selling it with your spouse, or making arrangements with you or your spouse to buy back your share of the equity.
Can Spouses Jointly File for Bankruptcy?
Up until this point, we’ve focused solely on what happens when just one spouse files for bankruptcy. But what about joint filings? And is this even an option?
While it is possible for spouses to both file for bankruptcy through a joint filing, in order to be eligible for this, all, or most of the debt belonging to each spouse, must be owed jointly with the other spouse. Plus, the LIT administering the file must agree that a joint bankruptcy makes sense.
There are advantages and disadvantages to a joint filing, so it’s important to discuss this with your LIT to see if a single or joint filing makes more sense.
What Happens in A Divorce or Separation?
Separation and divorce can be very complicated; in particular, when assets are owned by one or both spouses, and debts are owed by one or both spouses. Matters can get even more complicated if assets are jointly owned, and debts are jointly owed. This occurs as family law and bankruptcy law are sometimes in conflict or, they are silent on certain issues. Advice from a family lawyer and a LIT are critical before proceeding with bankruptcy.
As a general principle, however, it is important to note that even if you have signed a legal separation agreement stating that each spouse will assume half of any joint debts, you will not be released from jointly owed debts, as the creditors will not have agreed to the support arrangements made with your ex-spouse. A former spouse is considered by the creditors to be fully liable for joint debts and, therefore, if one spouse declares bankruptcy, the other will still be liable.
Spousal and Child Support Payments
If support arrears are owed at the date of bankruptcy, they must be disclosed to the LIT. They will be included on your list of assets and debts, called the statement of affairs.
However, unlike your other unsecured claims, your ex spouse or partner may, in certain circumstances, be permitted to continue to take collection action against you for the arrears, despite your bankruptcy.
Subject to court order, or agreement with your ex-spouse or partner, ongoing post date of bankruptcy support obligations must be paid.
Arrears owed at the date of bankruptcy, that have not been paid during the bankruptcy, or by the LIT from funds recovered in the bankruptcy, will survive your discharge from bankruptcy and must still be paid.
Benefits of Choosing a Consumer Proposal as an Alternative to Bankruptcy
As you can see, if you hold any joint debts and/or assets with a spouse, they will be affected in some way by your bankruptcy filing.
So, if you find yourself pondering the idea of personal bankruptcy but are concerned about the impact it will have on your spouse, consider a bankruptcy alternative, such as a consumer proposal.
A consumer proposal is a federal government regulated settlement agreement negotiated with your creditors by a Licensed Insolvency Trustee (LIT) acting as a Consumer Proposal Administrator. Under the terms of this agreement, you will be able to pay back a reduced amount of the unsecured debt you owe, within a specified timeframe, interest-free, while your creditors forgive the remaining balance and interest owed.
This will also legally protect you from unsecured creditors and their debt collectors, lawsuits, and garnishments.
To learn more about filing a consumer proposal, or other debt-relief options that will minimize the impact on your spouse, speak with a Licensed Insolvency Trustee to discuss your best course of action for tackling your debt.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!