Deciding the Sequence: Bankruptcy or Divorce First?
When you are at the crossroads of a failing marriage and mounting debt, you’re often faced with a tricky question: Should You File Bankruptcy Before or After Divorce? The answer to this largely depends on the financial circumstances of the respective spouses and the impact of bankruptcy or a consumer proposal on the marital assets.
Impact of Divorce and Bankruptcy on Marital Assets
Firstly, let’s delve into the intricate relationship between divorce and bankruptcy law and their influence on marital assets.
Bankruptcy and Assets
In the event of filing for bankruptcy, your assets are surrendered to a Licensed Insolvency Trustee, who then sells them off. The proceeds from the sale are used to repay your creditors, thereby settling your debt.
If you choose to file for bankruptcy before finalizing your divorce or separation, your assets are out of your reach and can’t be divided between spouses during the divorce.
This decision significantly affects the marital home, which is often the most substantial asset involved in a divorce. If you file for bankruptcy before the divorce, you relinquish control over what happens to the property. If the property has equity, the bankrupt spouse’s ownership now vests with the trustee.
Consumer Proposal as an Alternative
A consumer proposal, however, allows you to retain all your assets. Unlike bankruptcy, you negotiate with your creditors to repay a portion of what you owe over a period of up to five years. This means that the marital home remains yours to be distributed during the divorce.
But there’s a catch. When filing a consumer proposal, you’re obligated to list all your assets. Creditors might demand a higher repayment amount, given they feel entitled to the value of the equity.
Timing of Bankruptcy or Consumer Proposal
If you have substantial property, it might be prudent to file a bankruptcy or consumer proposal only after your divorce or separation. If the property is transferred from one spouse to another as part of a family order, legal separation agreement, or formalized divorce degree before filing bankruptcy, the property is now out of reach of the trustee. However, this separation agreement must not be seen as an attempt to hide assets from your creditors.
How is Joint Debt Handled?
While your impending ex-spouse is not responsible for your debts unless they’ve co-signed them, the situation changes when it comes to joint debt.
In certain cases, divorcing spouses might agree that one of them will continue paying for certain marital debt, like outstanding credit card debt. However, it’s crucial to remember that creditors are not bound by a family court order. If your spouse files for bankruptcy post-divorce, you might still be held liable for joint debt, despite your spouse agreeing to pay it.
To avoid such a situation, you need to get the creditors to remove you from the loan agreement before the other spouse files for bankruptcy or a consumer proposal. Remember, a bankruptcy or consumer proposal doesn’t deal with secured debt, so it won’t affect your mortgage payments if you retain the home, barring what you agree upon in the divorce agreement.
Surplus Income, Support Payments, and Bankruptcy
Filing for bankruptcy has implications on your income as well. Any income exceeding a certain limit prompts a surplus income payment into your bankruptcy to compensate your creditors. If you file for bankruptcy before your divorce, your spouse’s income can increase the cost of your bankruptcy or consumer proposal.
If you file for bankruptcy after your divorce, any alimony or child support payments you make can be deducted from your income before calculating the surplus. If you are receiving these payments, they will be added to your income for bankruptcy purposes.
When to Opt for Bankruptcy Before Divorce?
While it’s crucial to consult with your spouse, Licensed Insolvency Trustee, and divorce lawyer about your specific situation, here are some reasons why filing for bankruptcy before finalizing your divorce might be beneficial:
- Significant joint debts, which both spouses want to clear before finalizing the divorce settlement. You can file a joint bankruptcy or consumer proposal to eliminate unsecured debt. This is typically less costly and can simplify life during a difficult time.
- Threat of wage garnishment or asset seizure by creditors. Filing for bankruptcy or a consumer proposal can halt these actions while you finalize your divorce.
When to Opt for Divorce Before Bankruptcy?
Finalizing your divorce before filing for bankruptcy or a consumer proposal offers more flexibility in dealing with marital assets. This might be a good option if:
- You want to transfer certain marital assets during the equalization process.
- Your soon-to-be ex-spouse earns a significantly higher income.
- You will be making high alimony or support payments that can reduce your potential surplus income.
- Your personal or emotional situation necessitates completing your divorce before addressing other considerations.
Can Divorced Couples File for Bankruptcy Together?
Yes, divorced couples can file a joint consumer proposal or joint bankruptcy to alleviate their joint debts. Quite often, separated couples find it difficult to repay debts they managed while married, given their changed financial circumstances. The cost of divorce and managing two homes can drastically reduce available income to repay old marital or joint debts.
To decide whether a joint consumer proposal or bankruptcy is the best route, both spouses should consult a Licensed Insolvency Trustee to understand their individual financial obligations.
Wrapping Up
Filing for divorce and bankruptcy is a complex process that requires careful consideration. It’s important to consult both a divorce attorney and a Licensed Insolvency Trustee before filing for either. The decision of whether to file for bankruptcy or divorce first should cater to your best interests at the time. For further advice about the timing of your bankruptcy vs divorce, feel free to contact us for a free consultation. We’re here to help.
