Divorce is one of the most common causes of bankruptcy in Canada. If you’re put in a position where you have to file for bankruptcy during a divorce, it can make both processes more complicated. There are a lot of questions that people have involving bankruptcy and divorce, especially when they’re in the process of splitting their assets, when they have joint bank accounts and credit cards, or when they have shared debts.
It’s incredibly stressful when your family finances take a turn for the worse. Whether you’re recently divorced or going through a separation currently, you need the help of a debt expert who can answer all of your questions about the insolvency process. As Licensed Insolvency Trustees, we don’t just help you file bankruptcy; we make sure you have all of the information to make informed decisions about your finances.
If you’re considering bankruptcy and you have questions about how divorce can affect the process, get a free consultation with a Licensed Insolvency Trustee. Start by giving us some information about you and your situation in the form below, and we’ll meet with you to talk about how to move forward.Let’s Get Started
Filing Bankruptcy During Divorce
Filing for bankruptcy and divorce at the same time while possible, is likely not advisable. The two processes may be too complex to happen simultaneously, especially if you have shared assets or debts with your spouse. If you file for both at the same time, your bankruptcy may impact the divorce proceedings as relates to your division of assets and debts.
Since you will likely have to file for bankruptcy and divorce one at a time, it will depend on your financial situation whether you want to file divorce after bankruptcy or vice versa.
Filing for Bankruptcy After Divorce
One of the toughest things separating partners have to face is how divorce will affect their quality of life. Individuals who assume that one or both spouses’ standard of living will not be deeply affected by the separation can wind up facing severe financial consequences.
When you separate, suddenly you are facing expenses that you used to split with your partner, but now you only have your income. You may suddenly have to pay rent or mortgage payments and property taxes on your own. The divorce agreement may include child and spousal support, but there is still a period of adjustment. Both partners should expect to make lifestyle adjustments.
Failure to budget your new costs and income can quickly lead to dependence on credit cards, lines of credit, and even payday loans to cover basics. Covering daily necessities through credit can quickly spiral out of control, and it often ends in insolvency.
In addition to new expenses and adjusted lifestyle expectations, there are also legal costs to getting divorced. You can expect to pay lawyer’s fees, court fees, and application fees that will quickly add up, even for an amicable divorce. Contested proceedings, where parties cannot agree on terms such as the division of assets, custody of children or child support, or the allocation of debt, can cost tens of thousands of dollars depending on their complexity. The combination of legal costs and higher lifestyle expenses can quickly lead to untenable debt.
One way to protect against this is to prepare your finances by looking at your historical expenses for the past year. Getting a full picture of the past year will help you anticipate your true costs in the year ahead, giving you time to make adjustments as needed.
Dealing with divorce and bankruptcy in quick succession can feel like a disaster, but dealing with both is not that uncommon. Many people experience a shock to their finances after they separate and find it difficult to cope. Remember this: bankruptcy is a fresh financial start. While it may be difficult now, you’ll come out the other end without debt hanging over your head and the ability to start over.
If divorce has left you scrambling to pay your bills, talk to us about personal bankruptcy in Toronto and across the GTA.
Debts You Can’t Discharge with Bankruptcy
Bankruptcy can be an effective way to discharge credit card debts, payday loans, lines of credit, and CRA tax debt, but there are some types of debts that can’t be discharged. These include child support and spousal support or alimony.
Insolvency cannot discharge you from ongoing payments or from arrears (past payments that you still owe).
However, if you have been struggling financially after your divorce as you balance multiple types of debt, insolvency proceedings can help you get back on track. It can be difficult to keep up with new expenses during a turbulent time in your life. By filing bankruptcy on debts that you’re struggling to pay, you can clear the slate and make it easier to keep up with other obligations.
What Happens When You Get a Divorce After Bankruptcy?
Not only can divorce ultimately lead to bankruptcy, but it can also happen the other way around. Money is the number one topic couples argue about, and when one or both partners get into financial trouble, it can also spell trouble for the relationship.
Your divorce could be complicated if you filed for joint bankruptcy or a consumer proposal with your partner. Joint debts cannot be eliminated by a divorce agreement; both you and your ex-spouse will remain on the hook for any shared debts.
In a consumer proposal, you agree to make monthly payments for up to five years so that your creditors can recoup some of what they loaned you. In bankruptcy, you can wind up paying surplus income for months. In either case, even if you separate, both you and your partner are responsible for making those payments. If one partner refuses or can’t, then the other will usually be fully responsible for them, or else the agreement can be cancelled, and you can wind up back in overwhelming debt.
That said, if you are planning to divorce and you are having financial problems, it can be a good idea to file bankruptcy before divorce and complete the terms of the agreement before you file for divorce. It’s possible to separate and deal with your shared financial issues before you further complicate the issue.
This way, you can cancel shared debts that would otherwise have to be divided in divorce proceedings (adding to the legal costs) and dealt with separately by each partner. Solving your finances before moving on with divorce can streamline the process and save money if both partners are willing to cooperate with each other.
Frequently Asked Questions About Bankruptcy in a Marriage
Bankruptcy can be complicated, especially in a marriage – whether it’s coming to an end or not. These are some of the most frequently asked questions we hear about bankruptcy and divorce, as well as what happens when only one partner in a marriage files bankruptcy.
#1 Are You Responsible for Your Spouse’s Debt?
Married couples often worry that they will wind up responsible for their spouse’s debt if only one of them has to file bankruptcy. It’s a concern even for couples who plan to stay together. If you are considering a divorce, the question of whether or not you are responsible for your spouse’s debt in Canada is that much more urgent.
You are not responsible for any debts that your spouse took out individually or that they had when you got married.
When it comes to joint debt or co-signed debt, you do become solely responsible for debts you entered into together when your partner files bankruptcy individually. This also applies to loans on which you acted as a guarantor, which may have happened if your partner had poor credit.
#2 Can You Still Sponsor Your Spouse to Immigrate from Overseas?
If you are planning on sponsoring your spouse to help them immigrate to Canada from overseas, bankruptcy can prevent you from doing so. Canadian citizens and permanent residents can sponsor non-citizens to help them become permanent residents, but if you have not yet been discharged from your bankruptcy, your application will be denied.
#3 What Happens to Your Home if You File Bankruptcy Before Divorce?
Many people worry about their home when they have to go through insolvency. According to bankruptcy laws in Ontario, there is a $10,000 home equity exemption when you file bankruptcy. If you have less than $10,000 in home equity, your home is not part of the process. If you own more than the exemption, you can pay the bankruptcy estate to keep your home if you have other assets you can use.
Couples who jointly own their home share this exemption; it applies to both of them together. Together, the two of you would have a $10,000 exemption if you filed joint insolvency.
If your partner files bankruptcy individually and they own more than the exemption, you may have to pay their share of the equity to keep the home.
Financial issues and relationship problems often come hand-in-hand. Filing for bankruptcy and divorce can be a very complicated process. Give us a call, and we can help you find the best path forward for your financial future.