Bankruptcy Proceedings in a Marriage or Common-Law Relationship: A Comprehensive Guide
The decision to file bankruptcy is tough and requires careful consideration, especially when you are married or in a common-law relationship. In cases of shared assets or debts, this process can get complex. This guide aims to provide you with a comprehensive overview of the important aspects to consider when filing bankruptcy when married or common-law.
Understanding ‘Spouse’ in Bankruptcy Law
During an insolvency proceeding like bankruptcy, your marital status plays a crucial role. According to the Bankruptcy and Insolvency Act, a spouse is recognized as a husband, wife, or a common-law partner.
A common-law partner is defined as:
“A person cohabiting with an individual in a conjugal relationship for at least one year.”
This definition aligns with the standard set by CRA (Canada Revenue Agency) for tax purposes. Therefore, even if you do not file your taxes as common-law, you are considered as such if you have been living in a conjugal relationship for at least a year.
Impact on Spouse in Bankruptcy
The first question that comes to mind when considering bankruptcy is how it will affect your spouse. Generally, your spouse’s financial standing remains unaffected unless there are joint assets or debts involved. Let’s delve deeper into these aspects.
Joint Assets in Bankruptcy
Joint assets can include property or valuables that you and your spouse own together. The influence of bankruptcy on these assets depends on their type and the secured debts against them. Joint assets usually fall into three categories:
Exempt Assets
Exempt assets are protected under provincial and federal legislation from seizure in insolvency proceedings. These can include:
- A vehicle under a specific value without loans secured against it.
- An insurance policy with a designated beneficiary.
- Household goods and personal effects.
Assets Secured Above Their Value
If an asset has a secured loan exceeding its market value, it likely holds no realizable value in bankruptcy. The most common case is vehicles with loans surpassing their worth.
Realizable Assets
If an asset doesn’t fall into either of the above categories, it might be realizable in bankruptcy. This doesn’t necessarily mean you will lose the asset, but it might affect the total amount you need to pay into your bankruptcy.
Joint Realizable Assets in Bankruptcy
When dealing with a realizable asset that is jointly held, you generally have three choices:
Buying Back the Asset
You can purchase your share of the asset from your Licensed Insolvency Trustee.
Joint Owner Buying Back the Asset
The joint owner can also buy back the asset from the trustee, becoming the sole owner.
Trustee Selling or Registering a Lien Against the Asset
The trustee can sell the asset and distribute the proceeds to your creditors. Alternatively, they can register a lien against the asset, inhibiting its sale, transfer, or refinancing without full payment of the lien.
Treatment of Joint Debts in Bankruptcy
In the case of joint debts, both parties are responsible for the full repayment. If one person files for bankruptcy, the other person remains fully liable for the entire debt. However, as long as the co-signer continues to make payments, their credit rating will not be negatively affected.
Spouse’s Income in Bankruptcy
In a bankruptcy proceeding, your spouse’s income remains unaffected. The trustee may ask for your spouse’s income information for accuracy in determining your monthly expenses and developing a reasonable budget. However, your spouse’s income cannot be garnished due to your bankruptcy.
In case your spouse refuses to disclose their income, it may affect you negatively as the surplus income guideline set by the Office of the Superintendent of Bankruptcy gets halved, escalating your surplus income obligation.
Common Queries
Does my spouse’s credit rating get affected?
No, your spouse’s credit rating remains untouched unless co-signed debts are not paid regularly.
Do I have to provide my spouse’s information when filing personal bankruptcy?
The only information required about your spouse pertains to any joint assets and joint debts. The trustee also requires your spouse’s income information at tax time for income tax return purposes.
