Data suggests that around one in five people who file for bankruptcy or a consumer proposal are going through marital or relationship breakdown.
Therefore, many want to know how these legal mechanisms deal with things like child and spousal support.
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Are Child And Spousal Support Discharged During Bankruptcy?
Many people going through a separation or divorce become insolvent.
Living in separate properties increases the costs for each partner, causing many to accrue unsustainable debts.
Often, they must consider either getting a consumer proposal or bankruptcy to escape an untenable financial position.
As the law stands, the donor spouse must continue to make support payments in the aftermath of the bankruptcy, even after discharge.
Fortunately, the bankrupt party can deduct such payments from their gross income to reduce their total surplus income payments.
Suppose, for instance, that you earn $2,800 per month, live alone and now must pay $700 in support payments to your spouse.
If your surplus income threshold is $1900, your net surplus income is just $200 per month instead of $900, reducing the amount of money you have to contribute to your creditors from your bankruptcy estate.
The law, however, takes further measures to protect child support and spousal support payments.
If the donor spouse files for bankruptcy, all payments in 12 months of arrears are protected, and the receiving party can file to collect them from the bankruptcy estate as a preferred claim, ahead of other lenders (such as banks).
The money, therefore, flows to family first, before it goes to commercial interests.
Even if the bankrupt party meets all their arrears payments from the bankruptcy estate, they must continue to make child support and alimony payments, even after discharge, according to the original agreement.
Isn’t Bankruptcy Supposed To Be A Fresh Start?
The government initially put bankruptcy laws in place to give heavily indebted people a fresh start in life.
Many people in financial difficulties got there through circumstances beyond their control, including divorce.
Consumer proposals and bankruptcy are legal mechanisms that assist an unfortunate and unwilling debtor in getting out of an unsustainable situation.
With the help of a licensed insolvency trustee, they can often build a brighter future.
Despite this though, child support and spousal support obligations cannot be forgiven.
The law considers former spouses and children preferred parties.
So, people who are discharged from bankruptcy and still in work must continue making payments, regardless.
The law means that those on the receiving end don’t have to worry about child support or spousal support when somebody files a consumer proposal or bankruptcy.
The money will continue flowing, so long as the donor party has an income.
What’s more, the debtor is likely to make more regular support payments if they file for bankruptcy or a consumer proposal.
This is because both reduce the total amount that they must repay each month, leaving more income left over to make the payments.
If you have been affected by this issue, get in contact with a bankruptcy expert.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?