Divorce in Canada can be complicated when it comes to debt. Divorce can cause bankruptcy and bankruptcy can cause divorce. Study after study show that financial problems can lead to marital breakdown.
Filing for bankruptcy as you go through a divorce, or after, can make both processes more difficult and stressful.
Not off the Hook
If you are separated or divorced and have joint debt, you’re not let off the hook. Both of you are still liable for the money owed. If one of you files for bankruptcy, the creditors can go to the other ex-spouse and try to collect.
If you are in the process of going through a separation, one way of dealing with this is to have both of you take out new loans to pay off your old debt, so each of you know what you owe and aren’t affected by how your ex-spouse deals with the problem.
Of course, if you can’t get the loan and the two of you are overwhelmed by the debt, then you both may be forced to file for bankruptcy or a consumer proposal.
And Even if You Agree . . .
Your ex might play nice and stipulate in the separation agreement that he/she will be responsible for the joint debt. Problem solved? Not necessarily.
This agreement is not binding on the creditor who gave the money in the first place. Unless the creditor actually signs the agreement, too, the court can’t give you a pass on debt that was jointly signed.
So to get such an agreement written into your separation requires the cooperation of your ex and creditor, as well as help from a lawyer.
Courts Like to Play Nice With Each Other
Family and bankruptcy courts tend to respect each other’s decisions and one won’t usually overrule the other. So if a family court order decrees that you sign over your share of the matrimonial home to your ex, the equity transfer isn’t likely to be attacked in bankruptcy court.
Conversely, if you file for bankruptcy, then your non-exempt assets, such as your equity in the house, are vested with the trustee. It is generally taken off the table and not considered in a divorce.
Trust Your Trustee
If you are dealing with joint debts and only one of you is declaring bankruptcy, it’s best to let the trustee know which ones are held in common. If you aren’t sure, get a copy of your credit report or check with each of your creditors. If you situation is complicated, the trustee may also refer you to a lawyer to help you sort out the legal aspects.
The point is, when divorce and bankruptcy come together, there are a lot of thorny issues you must address. Come in for a free consultation at Richard Killen & Associates, and we’ll set you on the path to emotional and financial healing.