My Spouse is Filing for Bankruptcy

My Spouse is Filing for Bankruptcy

What Happens When My Spouse Goes Bankrupt?

If your partner is contemplating declaring bankruptcy, you may have numerous questions and fears. This guide aims to dispel the uncertainty and address some commonly asked questions about the impact of your spouse’s bankruptcy on your financial situation and assets.

1. My Spouse is Filing for Bankruptcy: Will I Be Bankrupt Too?

The straightforward answer is a resounding ‘No’. The insolvency of one partner does not automatically render the other partner bankrupt. This is a pervasive misconception that we need to dispel.

If you and your spouse have mutual debts or individual debts that are impossible to pay off, you may decide to declare bankruptcy together. However, this is an individual choice and not a legal obligation.

There are scenarios where one partner can afford to pay a portion of their debt, while the other cannot. In such cases, the partner who can afford to pay might consider a Consumer Proposal, while the other may file for personal bankruptcy.


What is a Consumer Proposal?

This is not the same as filing for bankruptcy. It’s a unique debt management solution that a Licensed Insolvency Trustee can help you with. Your total debts are reduced to an amount that you can afford to pay (usually between 20-50% with no interest), and the remaining balance is forgiven (or written-off) by your creditors.


2. Will I Be Liable for My Spouse’s Unpaid Debts If They Go Bankrupt?

Marriage, in itself, does not give your spouse’s creditors any right to demand payment from you for your spouse’s unpaid debts in case they file for bankruptcy.

You will not be held responsible for repaying the creditors for the debts eligible to be discharged unless you have co-signed on the debts included in your spouse’s bankruptcy. If a debt has been co-signed, the responsibility of repayment falls on the co-signer. A spouse could also be liable for credit card debt if they used a supplementary card in their name.

3. How Will My Credit Be Affected If My Spouse Files for Bankruptcy?

If the debts discharged under your spouse’s bankruptcy solely belong to your spouse, then your credit score and history will remain unaffected by their bankruptcy proceedings.

How Long Does Bankruptcy Stay on a Credit History?

A bankruptcy will reflect on the credit history for six years. However, it is possible to apply for and secure new credit within two to three years, sometimes even less. Many individuals who file for bankruptcy successfully obtain a new credit card, mortgage, or vehicle financing within a few years of bankruptcy discharge/completion.

4. Will My Assets Be Seized During My Spouse’s Bankruptcy?

As the spouse of a bankrupt individual, your separate assets are not of interest to your spouse’s bankruptcy estate or to the Licensed Insolvency Trustee (LIT).

It’s crucial to understand that filing for bankruptcy does not automatically result in asset loss. In many jurisdictions, several assets can be claimed as exempt from seizure and are thus “safe” from creditors. In fact, most individuals filing for bankruptcy will retain all their assets.

Learn more about How Bankruptcy Protects Your Assets

Sometimes, individuals contemplating bankruptcy might consider selling or transferring their assets to protect them from creditors. This is generally not advisable and often unnecessary due to provincial asset exemption laws. If assets have been transferred prior to filing for bankruptcy, the LIT may be required to inquire and report on the specifics of the transaction.

5. What Happens to My Income When My Spouse Files for Bankruptcy?

The income you earn during the period of your spouse’s bankruptcy, typically 9 or 21 months, remains yours and continues to be paid to you as usual.

Your spouse will be submitting a monthly budget form as part of their bankruptcy, detailing the household’s income and expenses. These budget forms are used to calculate “surplus income,” which determines how much money your spouse needs to contribute towards their bankruptcy, and also how long the bankruptcy period will last. These amounts and timing will be discussed and estimated in detail before the bankruptcy process officially begins. Thus, unless the household situation drastically changes, a bankruptcy is normally a “no surprises” proceeding.

What is Surplus Income in Bankruptcy? Learn more

While the bankrupt person is required to report and verify the income and expenses of the household and may be required to pay surplus income, as their spouse, you are not expected to pay any portion of your income, as it is not your bankruptcy. A non-bankrupt spouse can refuse to disclose their income should they choose to do so, although this will impact the bankrupt person by resulting in a reduced income standard being used to calculate their surplus income.

Despite sharing a household, a couple’s finances remain separate during bankruptcy. If you or your spouse are considering bankruptcy as a debt solution, it’s a good idea to bring your other half along during your first meeting. There can be a lot of information to discuss, and it is helpful to have a second set of ears. It also provides both of you an opportunity to ask questions and get your concerns addressed promptly.

Bankruptcy is a legal process most people are unfamiliar with, and it can feel overwhelming not knowing where to start. The Licensed Insolvency Trustees and Estate Managers are here to help.

Book your free confidential debt consultation to meet with a friendly and non-judgmental representative in one of our local offices. Your debt-free future is waiting!

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