Divorce and financial problems are both very stressful situations, and we often see clients dealing with them at the same time. Debt is still one of the leading causes of divorce, and one study showed that couples who fight about money weekly are more likely to separate.
Couples who are in debt and struggling to keep up financially face an uphill battle when they want to file for divorce. The divorce process can be expensive in its own right as you add legal fees to your existing expenses, and each partner faces a higher individual cost of living as they can no longer share expenses.
If there is a large amount of debt involved, the divorce process can be even more complicated. Some couples may consider filing joint bankruptcy or a consumer proposal before separating. However, this comes with significant risks, and it may be better to file individually after their divorce is complete.
When it comes to debt and divorce in Canada, there are no easy answers. The right path forward depends on the particularities of your financial situation, that of your ex-partner, and how much debt you share jointly.
Talking to debt professionals with David Sklar & Associates is the best way forward if you are considering bankruptcy or a consumer proposal before or after a divorce.
What Happens to Debt and Assets in a Divorce?
Before deciding how to proceed with your finances, it helps to understand what happens to debt and assets in a divorce. When you separate, assets and debts are divided either by negotiations between the two of you or as decided by the courts. The goal is to leave both partners on equal footing, and ongoing support payments may be included to that end.
Property acquired during a marriage must be equally split, but the division of assets can be complex, as there are a number of rules and exceptions that can change the outcome. The same applies to debts as well. Jointly-owned debts will be divided in a way the courts deem fair, and individual debts can even be made the responsibility of another partner, but creditors are not necessarily bound by those decisions.
Are You Responsible for Your Spouse’s Debt?
The first question we often get asked is whether or not you are responsible for your spouse’s debt, and the answer should give you some relief. No one is responsible for any debt that is individually taken on by another party. You are not responsible for:
Debt that your spouse entered the relationship with, such as student loans;
Debt that your spouse took out individually, such as a credit card that is in their name alone.
However, you are responsible for jointly-owned debt, such as a mortgage that you took out together, a shared credit card, or a shared line of credit. There are several ways to deal with a shared mortgage after divorce, and the specifics will likely have to be worked out in your divorce agreement. They typically include selling the home, refinancing the mortgage into one name, or buying out the other spouse’s share of home equity. Mortgages and other types of secured debt cannot be included in a bankruptcy or consumer proposal unless the underlying asset is turned over to the creditor.
What Happens to Co-Signed Debt or Joint Debt?
In some cases, one spouse may co-sign a loan, a credit card, or a lease, such as when one partner has a better credit score than the other. When you co-sign a loan, you become jointly responsible for repayment.
Should you separate, you cannot agree to a contract that gets either party out of co-signed debt without the permission of the creditor. Even if you come to a separate agreement in the divorce process about how to handle joint debt, such as one partner paying exclusively, creditors are not bound by that agreement. The creditor could still pursue either party if the other does not keep up with the payments they agreed to. What happens to co-signers with a bankruptcy is that the creditor will pursue the other signatory for repayment.
What Are Your Options for Dealing with Debt Before or After a Divorce?
Timing your divorce and dealing with financial problems is never easy, and you have a number of options. This section should introduce you to some of the most common insolvency options and how getting a divorce can impact them.
#1 Individual Bankruptcy or Consumer Proposal After Divorce
Filing bankruptcy or a consumer proposal individually after a divorce is often the easiest path to take. Once your divorce is complete, your assets and debt have been divided, and there will be no confusion about how much you own or owe. If you are obligated to pay any support payments such as alimony or child support, this will also be established, and it can help a Licensed Insolvency Trustee determine how much you can afford to pay your creditors and whether or not you qualify for a consumer proposal.
Filing separately also removes uncertainty and dependence on your ex-partner’s participation. When you enter into a joint process, whether it’s a bankruptcy or a consumer proposal, you rely on the participation of both parties. If someone stops cooperating, one party can wind up responsible for the entire debt.
#2 Joint Bankruptcy Before Divorce
The primary advantage of filing together is that it can be more cost-effective than filing separately. Joint bankruptcy will also give you a clearer picture of the debts and assets that must still be divided in the separation agreement.
Urgency is another factor to consider in bankruptcy and divorce that may prompt you to seek debt help before anything else. If creditors are threatening wage garnishment or asset seizure, you want to deal with joint bankruptcy before divorce and as quickly as possible. Divorce can be a lengthy and complicated process. If you’re already failing to keep up with debt payments, creditors may force your hand.
The Disadvantages of Joint Bankruptcy Before Divorce
Joint bankruptcy before a divorce comes with considerable risks. Debt is one of the leading causes of divorce, and bankruptcy can put a strain on any relationship.
One of the disadvantages of joint filing is that both procedures are tied together, and both parties will have to keep up with paperwork and meet their obligations for things to proceed with the other party. Unless both parties are on the same page about filing bankruptcy together, it may not be the best way forward.
If one couple fails to keep up with their obligations, such as payments to creditors in a consumer proposal, the other partner can wind up on the hook for the whole amount. As relationships break down in the lead-up to a divorce, you may not be able to rely on your ex-partner to hold up their end of the agreement.
Couples with a large income disparity may also want to wait until after divorce to deal with their finances. If one partner can expect to make high support payments, they can deduct those payments from their surplus income, reducing the payments that would otherwise have to go to their creditors.
Finally, personal and emotional circumstances may simply take priority over your financial situation. Sometimes it is a matter of personal preference to finish the divorce first and get it over with.
#3 Joint Consumer Proposal Before Divorce
Filing a consumer proposal before a divorce can be very risky. First of all, consumer proposals can last up to five years, depending on how much debt you have to repay. That is a long time to remain financially tied to someone with whom you are separated.
In a joint consumer proposal, creditors are not concerned about which party they collect from or any private agreements about how those payments are split. If one party stops making payments, they can pursue the other party for the entire amount.
If you default on consumer proposal payments, the entire agreement can be dissolved, and you can wind up forced into filing bankruptcy or paying your full debts.
#4 Can Couples File Joint Bankruptcy After a Divorce?
It is not impossible or uncommon to file a joint bankruptcy after your divorce. After a divorce, people often find that they are unable to keep up with debt payments that they managed without issue before their separation. When you can no longer split expenses, your individual cost of living can increase substantially, making it tougher to manage debt payments.
That said, after a divorce, it is usually safer and more reliable to file bankruptcy or a consumer proposal independently.
Bankruptcy and divorce are emotionally taxing and stressful situations to deal with. Talk to a Licensed Insolvency Trustee about the options you have for dealing with bankruptcy and divorce and whether it makes more sense to pursue one before the other.
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