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Divorced couples with joint debts may have become trapped in these debts for different reasons such as joint credit cards, a joint loan or a line of credit signed together.
One out of seven bankrupts who claim bankruptcy in Canada list divorce or separation as at least a factor in their money problems.
Bankruptcy and Divorce: Some couples might have co-signed a loan or lent a substantial amount of money to a child, or other family member, such as for a down payment on a home.
If you are recently divorced or are going through a divorce the bankruptcy process can become more complicated and your divorce will have an impact on your bankruptcy.
With the costs and legal fees of getting divorced, bankruptcy becomes a real possibility for divorcing couples.
Bankruptcy and Divorce – Joint Debts
When you separate or divorce in Canada you will both still be responsible for any joint debts you hold together.
Even if your personal relationship has broken down, you must continue paying your obligations, and if one member of the couple does not, or cannot pay, the other person will be responsible to pay on the debt.
Even if the ex-spouse did not use the jointly held credit card or was responsible for the debt during the marriage, they will now be fully responsible for the debt in full.
Therefore, if one person declares bankruptcy, the other person in the relationship will have to continue making full payments on any debt remaining.
If your creditors cannot collect from the bankrupt, they will turn to the ex-spouse for collection on the full balance of the debt owed.
You might be able to get your bank to agree to split the joint debt into two new loans.
Bankruptcy and Divorce – Secured Joint Debts in Bankruptcy
When you go bankrupt and have joint debts you might be able to make arrangements with your creditor(s) to keep the asset if you are able to afford the payment requirements on the secured asset, such as your car or home. If you cannot afford the payments or would like to surrender the asset your part of the equity in the secured asset will have to be sold.
Unfortunately, selling equity in a jointly held asset can become quite challenging for a divorced debtor.
How Does Divorce Impact Bankruptcy & Joint Debts?
If your marriage has dissolved through divorce or a separation the agreement that dissolves your partnership does not legally separate the responsibility for jointly held debts.
In order for your joint debt responsibility you need to have a new agreement drawn up, which requires your creditors cooperation, which is not always possible, and the assistance of a lawyer.
Bankruptcy and Divorce – My Ex-Spouse Has Gone Bankrupt
If your ex-spouse has gone bankrupt you will be responsible for all of the joint debts in full.
If you are unable to afford these new financial responsibilities you will be required to file a consumer proposal or go bankrupt.
It is not uncommon for both spouses to have to file insolvency through a bankruptcy or debt proposal to deal with debts that accrued during marriage.
What Debts Does Bankruptcy Eliminate?
Bankruptcy will eliminate most of your unsecured debts but will not eliminate alimony support payments or child support payments.
If your divorce / separation agreement gives you assets in return for support payments you will lose the assets if they are not protected by the exemptions in your province but your support payments will still have to be made.
Any child support payments also survive a bankruptcy.
Assets & Equalization Payments in Bankruptcy
The timing of your bankruptcy and divorce will impact how your assets are handled during the bankruptcy.
When you get divorced before you file bankruptcy, your assets that were transferred as part of the divorce agreement will remain the property of your spouse and will not be available to be seized by the trustee.
However, if you decide to go bankrupt before getting divorced your assets will become part of the bankruptcy estate if they are not protected by the bankruptcy exemptions.
If you have any questions about this or other aspects of bankruptcy or filing a consumer proposal you can set up a FREE consultation with our Licensed Insolvency Trustees.