How To Deal With Divorce And Bankruptcy

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Posted in Personal Bankruptcy
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

Relationship Breakdowns, Separations, Divorce and Bankruptcy -fb

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Generally, money problems and financial problems go hand in hand. In fact, 28% of our clients were separated or divorce when they filed for insolvency. And 19% cited marital or relationship breakdown as the main cause of their financial difficulties. To help me delve deeper into the relationship between divorce and bankruptcy law, my partner of Hoyes, Michalos, & Associates Inc., Ted Michalos joins me on today’s episode of Debt Free in 30.

Relationship breakdowns can lead to divorce and bankruptcy

When a relationship starts to fail, the last thing anyone focuses on is taking care of money. In fact, spending often increases as a way to make things 'better' and both partners forget to pay attention to their debt. When the relationship falls apart, the debt that was incurred during the marriage will have to be dealt with.

Moreover, when a couple separates, they're no longer sharing expenses. They are now renting their own space, purchasing their own furniture and appliances, buying their own groceries, paying for their own utilities. These increases in the cost of living can lead to more debt.

Debt incurred both before and after divorce can cause some individuals to become insolvent.

How are support and alimony payments dealt with in a bankruptcy?

Support and alimony payments are set by a court order or by a divorce or separation agreement. The only way those payments can be changed or reduced is by the same court. Bankruptcy cannot deal with alimony or support payments. Similarly, it cannot deal with support arrears. If your child support is in arrears, negotiate with your ex-spouse or contact the family responsibility office. Ted adds:

Under Ontario law the maximum that you can be garnisheed for any sort of support payment or judgment is 50% of your pay. So, if you're already at the 50% maximum, that's as far as you're going to go anyway.

If you are behind in your support payments because of the other debt you are carrying, then a consumer proposal or a bankruptcy is a good choice depending on your financial circumstances. Filing for insolvency will not eliminate your support payments but it can make it easier to keep up with support costs if all your other debts have been dealt with.

Child support and alimony payments can be deducted from a bankrupt’s monthly net income. This can put them below the government’s surplus income threshold, allowing them to avoid paying surplus income payments and reducing the length of their bankruptcy.

What if the couple owned assets together?

When a couple separates or divorces, they make a list of their shared assets and a list of their own assets. Money will be paid or assets will be transferred to make those numbers equal between the couple.

How those assets are dealt if one spouse files bankruptcy with will depend on what comes first: the divorce or the bankruptcy. For example, if a couple has $100,000 equity in their home and they divorce, than an equalization payment must be made for $50,000 to one of the spouses. But if one of the spouses files for bankruptcy before divorce has been finalized, then the $50,000 becomes an asset of the bankruptcy estate.

Ted explains why it is important if you are in the middle of a divorce or separation, and considering bankruptcy that you talk to both your lawyer and your trustee ahead of time. As Ted says:

there are things that need to be done in a certain sequence to optimize the situation.

What if they have joint debts?

Joint debts mean both spouses are responsible for repaying the debt. A separation or divorce agreement where one spouses agrees to repay the debt, does not release the other spouse from their financial responsibility. If one spouse files for insolvency on a joint debt, liability transfers to the other spouse, and the creditor or bank will approach them for repayment.

If you are dealing with significant joint debt, you should talk with your bank to arrange new, separate, loans, lines of credit and credit cards. The bank may or may not agree to let one spouse off the hook.

Can a divorced couple file a joint consumer proposal?

If the joint debt is large, it's not unusual for both ex-spouses to have to file a bankruptcy or proposal. They can do so separately or 'jointly'. In fact, Ted recommends a joint proposal, if a separated or divorce couple can get along.  He notes:

That’s usually the least expensive way to do it. If they file proposals separately, the debts end up being counted twice and they end up paying back more in total between the two proposals than they would in just one.

What if you’re going through a separation or divorce?

Ted advises anyone in a relationship to maintain separate and independent financial records. This means having your own bank account, credit card, and your own loans. Keep the co-signed loans to a minimum such as a mortgage.

If you are separating, opening a new bank account at a different bank. Ted mentions:

There are times when one party will deliberately go out and incur more debt just as a penalty for the other one. So, the sooner your finances are independent and you're on your own, the better you'll be.

He also suggests telling the bank that you would like the credit limit fixed on joint credit cards to prevent the debt from racking up.

In addition, you need to make a complete inventory of all your accounts. Checking your credit report will help by listing all major banks and credit grantors. And be sure to speak with your ex about not using joint credit cards anymore and encourage them to apply for their own credit card.

Lastly, if possible try to handle your separation or divorce before filing for insolvency as filing bankruptcy in the middle of the process only complicates the divorce.

Listen to the podcast or read the transcript below to learn more.

Resources mentioned in the show

FULL TRANSCRIPT show #95 with Ted MichalosRelationship-Breakdowns-Separations-Divorce-and-Bankruptcy-podcast

Doug Hoyes; It's the end of the month so it's time for a Frequently Asked Questions episode here on Debt Free in 30. And today all our questions are going to focus on one of the most common reasons for financial problems: relationship break ups.

When you look at the numbers more than one quarter, about 28% of our clients were separated or divorced at the time they filed a bankruptcy or a consumer proposal. And 19% of our clients said that marital or relationship breakdown was the main cause of their financial difficulties.

So, why is that? What are the issues and what can you do? To solve those things, to find out, I've asked Ted Michalos to join me once again, so Ted, let's start with the first question, why is it that people who go through a relationship breakup end up having more financial problems than if they were still together? What are some of the common reasons?

Ted Michalos: Well, you know what the question we probably have to ask, answer, first is did the money or financial problems cause the breakup or did the breakup cause the financial problems? 'Cause what happens when your relationship starts to deteriorate, is you don’t pay attention to some of the basic things and that usually means money. So, you order out more, you're buying things either for yourself or your family members as a way of instant gratification, you're buying love. And while you're not paying attention to all these details, your debts start to spiral out of control. Then when the relationship actually breaks down, well somebody's still got to pay for all these bills so it can be a hell of a mess.

Doug Hoyes:  So, it's a chicken and an egg thing then. What's the answer to the question then? Do the financial problems cause the relationship breakdown or does the relationship breakdown lead to financial problems?

Ted Michalos: In my experience it happens both ways. So, there are relationships that were in fine shape until money got tight. And then the money adds a pressure to the relationship that they couple just can't deal with. Also there are relationships that were never going to work. And quite frankly doesn't matter how much money they through at the problem, they just never were going to work.

Doug Hoyes:  So, it can happen both ways. So, you're together and things are financially humming along, there's some perhaps external shock, somebody loses a job, something like that. And then as a result, maybe not as a result, but inevitably you end up getting separated, why does that cause an extra financial burden then?

Ted Michalos: Well, let's think about the basics, when you're living together you've got either one mortgage or one rent to pay every month. And now you're separated and there are two. Let's think about the things in your household. So, you've got one household, you got one toaster, you've got one microwave oven, you got one set of monthly bills. Again, now that you're separated, you've got to have two. And all of that creates all sorts of pressure. There are - accountants call it economies of scale. There are some things that are less expensive the more people that are involved in the household. You lose all of those when you start running multiple households.

Doug Hoyes:  So, it's the old saying two can live as cheaply as one.

Ted Michalos: Correct.

Doug Hoyes:  It's not entirely true but if we -

Ted Michalos: Not with my wife.

Doug Hoyes:  If we live in a one bedroom apartment and we get separated and we both end up getting a one bedroom apartment, well obviously our living costs have doubled for that.

Ted Michalos: That is the single biggest hit, the living costs suddenly doubled because you're not sharing anything.

Doug Hoyes:  You've each got your own phone now, your own cable, your own hydro, your own -

Ted Michalos: Your own groceries, your own - again, the toast's a silly example but you both need a toaster.

Doug Hoyes:  Yeah, I guess with groceries the cost probably come down if there's fewer people. But a lot of the other things are fixed costs, that's just the way it is. Now we need to have two cars, we can't share one that sort of thing.

Ted Michalos: The groceries don’t necessarily come down either. 'Cause you're not buying the right type of food and you both got to have that bottle of ketchup in the fridge. It may take you a little longer to go through it, but you're still spending that money at least upfront to establish your new household.

Doug Hoyes:  So, it ends up causing financial problems. And as I said at the opening, almost 20% of our clients who ended up filing a bankruptcy or proposal said it was that separation or divorce that directly attributed to their financial problems.

Ted Michalos: And we're not even touching on debt issues now. So, let's say the couple had, you know, a couple of credit cards and a line of credit, well again what I was saying earlier as the relationship starts to deteriorate, people tend to order out more, they buy more things to make themselves or their family members feel better. They're not paying attention to the debt. Once that relationship is broken down, the debt is still there and somebody's got to deal with it.

Doug Hoyes:  And if you are needing to buy that second toaster that may be the time you end up going into debt. Again, we're using a silly example.

Ted Michalos: Do they still sell toasters? I don’t know, I assume they do.

Doug Hoyes:  I'm sure they're fancier than they used to be. But I mean whatever you need, you need furniture for your new place, whatever you end up using debt to purchase that and all of a sudden boom, you've got more debt than you started out with.

So, let's take the story to its logical conclusion then, let's say that due to the separation or the divorce, I've now got a whole bunch more debt than I used to have and I end up saying, you know what? I've got no choice here, I've got to file a proposal or a bankruptcy, how is that going to affect my life? So, let's take the first issue alimony and child support. How is that dealt with in a bankruptcy or a proposal?

Ted Michalos: So, the first thing everyone needs to understand is that support payments are generally set by a court order or by a divorce or separation agreement that you sign off on. In Ontario they are government published grids or scales showing you how much support you should be paying for children and guidelines for what you should be paying in the form of spousal. So, if a court orders a support payment of some description, then the only way that that payment can be changed or reduced is by the same court. So, bankruptcy's designed to deal with your unsecured debts, credit cards, lines of credit, payday loans, let's not talk about them today.

Doug Hoyes:  No, no we did enough shows on those.

Ted Michalos: And things like that. It cannot deal with support, more importantly it cannot deal with support arrears. So, if you agreed to or been ordered to pay support, it's something you're going to continue to pay until a new agreement or court order's in place.

Doug Hoyes:  So, let's look at that, what you just said from the point of view of the person paying the support and the point of view of the person getting the support. So, if I'm the person paying the support and I got a bunch of support arrears, so, we got separated, I wasn’t able to keep up with my support, so I've now got a bunch of other debt as well. If all I have is child support owing, does it make sense to go bankrupt?

Ted Michalos: No, it doesn’t make any sense at all, it won't protect you. Your best line of defence if your problem is just child support arrears is to negotiate either with your estranged spouse and you probably won't be able to do that if you're deeply in arrears or contact the family responsibility office and say this is what I can afford to pay. Under Ontario law the maximum that you can be garnisheed for any sort of support payment or judgment is 50% of your pay. So, if you're already at the 50% maximum, that's as far as you're going to go anyway.

Doug Hoyes:  So, let's assume then that I got separated, that I got a bit behind in my support but I've also got a bunch of other debt as well.

Ted Michalos: Which is almost always the case.

Doug Hoyes:  That's the situation, I've got a whole bunch of other debt as well so does it make sense potentially to consider a consumer proposal or a bankruptcy in that case?

Ted Michalos: It certainly can. I mean if the issue is you've only got so much money coming in every month and now a portion of it is being paid to support for your children or your ex-spouse, that's just the way that it works. You're left with X amount of dollars. You've got to pay your basic living expenses so whatever's left is going to be dealt with, you're going to throw it at your debts.

So, if you have enough that you can offer to repay a portion of your debts, then a consumer proposal's a great plan. And what it does is it stops the interest and it gives you one monthly payment to worry about. They can't take legal action against you, you don’t have to worry about another wage garnishee. If you have very little money left over, then perhaps the bankruptcy makes sense because it draws a line in the sand and it eliminates the debt.

So, again you're trying to get a problem off your plate. Can't do anything about the support, you're going to deal with that as long as the children are in school, the spousal support will last as long as you're ordered to. But we can help you deal with all of these other things. And frankly they're the ones that cause you the most grief.

Doug Hoyes:  So, that's really the key point, that your support isn’t going away whether you're bankrupt or not. But if you do a proposal or a bankruptcy you can ease the pressure from all the other debts, which gives you the money to pay your support.

Ted Michalos: That's right.

Doug Hoyes:  It's pretty much as simple as that. So, you talked about whether I have a lot of money or not a lot of money so let's take the example of a single guy who has, I don’t know, he makes three grand a month.

Ted Michalos: That's a decent job, yeah.

Doug Hoyes:  And he's ordered to pay, you know, a thousand dollars a month in child support. What does a bankruptcy look like for him?

Ted Michalos: Well, so the government has established guidelines or standards for how much money they think an individual needs to live on. Single guy it's about $2,100 a month. So, that's after tax, after support, after all deductions. So, if this fellow is making $3,000 and paying $1,000 in support, he's left with $2,000 a month to live on. The government would say if he were to file bankruptcy it'll just be the cost of the bankruptcy, usually somewhere around $1,800, $2,000.

Doug Hoyes:  So, he doesn’t have to pay anything extra. So, support payments that I'm making are used to reduce my income, which in some cases will put me below this government threshold.

Ted Michalos: And the flipside of course is that the support payments are counted as income for the person that's receiving them. So, I don’t know, let's say I was paying support to an ex-wife so it comes off of my income when we're calculating what a bankruptcy would cost me but it would be added to her income when we're figuring out what a bankruptcy would cost her. And that just makes sense.

Doug Hoyes:  So, I guess that's the answer to the second part of the question then, how does a bankruptcy impact on the person who is receiving the support, which more commonly is the wife but obviously doesn’t have to be. So, in that particular case, the recipient's income is increased by the amount of support they're receiving.

Ted Michalos: That's right.

Doug Hoyes:  So, using an example so let's take a person who has one dependent.

Ted Michalos: Okay.

Doug Hoyes:  Okay? And we're recording this in 2016, the numbers we're recording change slightly each year so if you're listening to this podcast five years in the future, the numbers might be slightly different. But for a family of two, so a single parent with one dependent, they're allowed to earn roughly how much?

Ted Michalos: $2,600 a month.

Doug Hoyes:  About $2,600 a month. So, if I have a job and I'm making $2,500 a month I'm under the limit. But if I'm the person on the other side of this transaction getting the $1,000 in support, that would put me over the limit.

Ted Michalos: That's right. And another complication, things like baby bonus and the universal child benefit that's out now, those are treated as income as well. It's unusual for the spouse receiving support to end up being penalized in this way 'cause usually their income is significantly lower. That's one of the ways the systems work. But it's certainly possible. The magic number again for that family of two is around $2,600. So, if someone was working making $800 a month part-time, they're receiving $700 a month in baby bonus and other government benefits and $1,000 in support, that's $2,500 a month. They're still under the guidelines so they'd be okay. But obviously if they tried to work any overtime or get a second job, it could put them in jeopardy.

Doug Hoyes:  And when you're doing that math, you would deduct childcare costs.

Ted Michalos: That's exactly right so that's another big complicating factor. If in order to work, or for whatever reason, you've got to pay childcare costs, the government considers that a deduction from your expenses before they charge what a bankruptcy would cost you too.

Doug Hoyes:  So, I guess the summary point here is if you are considering a bankruptcy, you want to crunch the numbers first. If you are paying support that potentially lowers what you'd have to pay in a bankruptcy, if you're receiving support that potentially increases what you'd have to pay in a bankruptcy, but the math has to be done. There's so many moving parts here as you described.

Ted Michalos: It's going to sound self serving but frankly the best advice I can give you is to contact a licensed insolvency trustee to ask them to walk you through the numbers. There's no charge for that first meeting. And these government payment calculations can be tricky. I mean they confuse people in the industry so a lay person really could be blindsided by them.

Doug Hoyes:  But it's a calculation.

Ted Michalos: It's math.

Doug Hoyes:  Yeah, we can do it in a minute, it's, you know, we got the where with all to do that very quickly. So, rather than trying to follow all the numbers we're throwing around here I agree, talk to a license insolvency trustee and we can walk you through it. So, we talked about the whole income side of things, so what happens if we go bankrupt and we own assets together?

Ted Michalos: It starts to get a little more confusing. So, the way family law works, at least in Ontario, and most provinces in Canada, there's an equalization of the assets. So, for instance they make a, in a divorce or separation you make a list of the things that you own yourself and that your spouse owns them self. And then there's a list of things that you own together, most often that's the matrimonial home or cottage. And then you... some sort of assets will be transferred or money will be paid to make those numbers equal.

Doug Hoyes:  Well, so let's take an example then. We own a house together.

Ted Michalos: Yep.

Doug Hoyes:  And the house is worth, I don’t know, $400,000 and the mortgage on it is $300,000. So, just for the sake of total simplicity here, let's assume then that the equity in the house is $100,000 and if one of the spouses is going bankrupt, how does that affect them?

Ted Michalos: Well, so the plan through a separation or divorce would be that $100,000 would be divided by two, each spouse is entitled to 50% if they own the house joint and separate or if they were married. Interestingly, it's an aside. In common law relationships you don’t equalize the assets. That's something to talk about in another show.

So, $50,000 is going to either spouse. If one of the spouses files bankruptcy before the house has been dealt with, then that $50,000 of equity becomes an asset of the estate. So, the person's trustee is going to have to deal with that $50,000 for the benefit of their creditors. It complicates things greatly.

Doug Hoyes:  So, if my spouse goes bankrupt and we are still - we both own the house together. I guess it doesn’t matter if we're separated or not, we both own a house together.

Ted Michalos: Your equity's worth $50,000, we got to deal with it.

Doug Hoyes:  So, the spouse who goes bankrupt has to either has to give half a house to the trustee or has to give $50,000 in this particular case. So, now what about the scenario where we get separated and one of the spouses says hey, I'm giving the house to you, you've got the kids, you get the house. As part of the separation agreement you get the house and then subsequently that spouse goes bankrupt. How does it work then?

Ted Michalos: That's actually fairly common. If it's a bonafide transaction so the spouse gifting the house to the other spouse has done it for legitimate reasons, then the court generally won't do anything about it. So, for example instead of the husband paying spousal support for the next five years, he's given the house to his ex-wife. Now the court would view that as saying okay, he's gotten himself out of the obligation of spousal support so he now has more money to pay his own obligations and in exchange for that he's given her the house. That would probably be viewed as a legitimate transaction.

There are cases where people do this as a bit of a scam. So, they pretend they're being separated or divorced, one of them files bankruptcy and yet, you know, three weeks later they're back living together and they say well, we've reconciled. If it's not a real transaction there is a risk that you can get into trouble. That's not for most people.

Doug Hoyes:  Again, the point here then is there's a lot of complications to this. It's not simple and straightforward. And our advice whenever you're going through a separation would be to speak to a lawyer, we're not lawyers, we're not trying to give legal advice here. We're not trying to explain all the intricacies of how assets are split up and all the rest of it, it's something you want to consider going into it so that you know what the potential ramifications are.

Ted Michalos: And we take that a step further. If when you sit down with one of our trustees you tell us that you're going through a separation or divorce, you're going to be asked specifically, is your lawyer aware that you are here talking to me today because there are things that need to be done in a certain sequence to optimize the situation. I mean it's a bad situation but you want to make the best of it.

Doug Hoyes:  Yeah and you gave the obvious example if the separation agreement is done and the house is transferred before one of the parties goes bankrupt, well then the other party, generally speaking, gets to keep the house. And that's probably the correct result. I want my kids to have the house they grew up in, to be able to live in. And so by organizing things in a logical manner, you can save a lot of problems.

Ted Michalos: No matter how mad you are at them, take your time to talk to a lawyer, take your time to talk to a trustee and do it in the right sequence.

Doug Hoyes:  'Cause it will end up helping you. So, final issue then to discuss is debt. So, we talked about assets, what happens if we have joint debt together?

Ted Michalos: Well, here's the typical scenario, one of the spouses generally the man, will say I'll take the debt on and they, as part of the separation or divorce agreement, agree to pay it off. The problem with that scenario is of course that the lender isn’t party to the agreement. So, the lender, one of the big banks, approved the two of you for this joint debt, line of credit, loan, credit card, whatever it is. And just because one of you says I'm going to pay it off, it doesn’t mean that the lender has said well, we're going to let the other one off the hook. And that's the trap that most people fall into.

So, Bob takes on all the debt so that Carol can get on with her life. Bob defaults on it and files bankruptcy or a proposal and the bank goes after Carol for the joint she was co-signed or joint on.

Doug Hoyes:  And Carol's saying wait a minute that's not fair, Bob said he's going to take it and we got a separation agreement, he said he was going to take it. Come on bank, you can't come after me now.

Ted Michalos: It doesn’t matter 'cause the bank wasn’t party to your separation agreement, the bank approved the two of you to borrow the money. And the bank expects both of you to pay it back.

Doug Hoyes:  And that's the key, you're married to each other, you're not married to the bank, you got divorced from each other, well you didn’t get divorced from the bank. So, is it as simple as just saying okay we're going to get divorced, I'm going to take on all the debt so let's go to the bank now and just take your name off it.

Ted Michalos: If both of your credit histories and records are good, you might be able to do that. And we certainly suggest that people try, but in most cases the banks had two people sign that loan or credit card agreement for a reason. They wanted both of you to be on the hook. So, unless you are in really strong financial shape, they're not likely to let one of the people off.

What you end up doing is negotiating new loans, new lines of credit, new credit cards and transferring balances. So, again we'll go back to Bob and Carol, they've got the joint line of credit, well Bob applies for a new line of credit and uses it to pay off the old one. And then Carol's not involved with this new debt at all. That's really the only way to protect Carol.

Doug Hoyes:  And of course it's not as simple as that for Bob because then if he goes bankrupt the next day, the bank's going to say wait a minute you just got this brand new line of credit yesterday, what were you doing? So, again there's a lot of moving pieces here. And there are things you can do to protect your family but you got to do the thinking up front. And again talking to an appropriate lawyer, a licensed insolvency trustee to figure it out is the way to do it.

One final question is it ever possible for the two spouses, who are now separated but they've got all their debt together, to file a joint proposal to deal with it all in one swoop?

Ted Michalos: Certainly. And quite frankly that's usually the least expensive way to do it. If they file proposals separately, the debts end up being counted twice and they end up paying back more in total between the two proposals than they would in just one. Here's the catch though. They've got to be co-operating enough with each other that they -that somebody's going to make the payments every month. So, if you agree that you're each going to make half the payment and one of you gets mad at the other and stops paying, you're both in trouble.

Doug Hoyes:  Yeah 'cause in a lot of proposals, the bank is going to say yeah we want to be getting 30 cents on the dollar so if you each file a proposal separately, well they may want 30 cents from each of you. If you file a joint proposal, well it's 30 cents in total. But you're right, if it's going to be a five year proposal and you're now separated and getting on with your life, who's making the payments? Well, it's financially the best option but it may not practically be the best option.

Excellent well, thanks very much Ted, I think we covered a lot of ground there. We're going to take a quick break and be back in a moment. You're listening to Debt Free in 30.

It's time for The Let's Get Started here on Debt Free in 30. I'm Doug Hoyes and I'm joined by Ted Michalos and we're talking about the financial implications of separation and divorce. So, Ted in this segment we like to focus on practical advice for people. At the end of the first segment we talked about when it makes sense to file a joint proposal or not. The advantage of a joint proposal is it's cheaper. The disadvantage is well, you're still kind of joined at the hip even though you've just gone through a separation. So, when you're meeting with someone who is going through a separation or a divorce, what are the first kinds of practical advice that you're giving that person.

Ted Michalos: The best advice for anyone in any sort of relationship is to maintain separate and independent financial records. So, have your own bank accounts, have your own credit cards, have your own lines of credit, your own loans. You only want to be involved with a co-signer or co-borrower to the minimal amount so that probably means the mortgage, it might mean a car payment. You don’t actually want to operate joint bank accounts unless you're doing it as convenience but you want to maintain your own records.

Doug Hoyes:  So, I'm going through a separation right now, the first thing I should do then is open my own bank account at the same bank that we've also banked at or at a different bank?

Ted Michalos: From a practical standpoint, you might as well switch to an entirely new financial institution. If for some reason you really love your old bank, there are provisions in the law to let banks go into different accounts if you owe them money.

What you're trying to do here at the beginning of the separation or divorce is to start to separate yourself. So, you move your money into your bank account, you apply for your own credit cards. And then you cancel the old accounts so that the debts there can't get any larger. Again, remember what we said in the first segment, what happens when a relationship starts to breakdown is you eat out more, you buy more things to make yourself and your family members feel better and your debt starts to rise. Well, there are times when one party will deliberately go out and incur more debt just as a penalty for the other one. So, the sooner your finances are independent and you're on your own, the better you'll be.

Doug Hoyes:  And that's a key point. I guess if we have a joint credit card, then either one of us can use it. And so if the other person decides hey I'm going on a trip to wherever and racks it up, I'm on the hook for it. So, job number one, the whole point of your separation and divorce is to get a fresh start.

So, open a brand new bank account at a brand new bank and sever your ties with the old institution. Now obviously they're not going to just let you close the bank account that has an overdraft on it if you don’t pay the overdraft. But the very least you want to say to your bank okay, I want the credit limit fixed, I want, you know, no more transactions to go on these particular cards. I don’t want to get any farther into the hole.

So, that's the first step is, you know, start fresh, brand new accounts. So, then what are the next things that go through your mind when you're dealing with going through a separation or divorce?

Ted Michalos: So, you need to get a complete inventory of just how many accounts are out there. It's not uncommon for someone to apply for a credit card and just ask for a supplementary one for their spouse and maybe they use it. Well, as soon as you use it, you're on the hook for the debt. You need to be aware of all of these things, all of these risks that you've been exposed to.

Doug Hoyes:  How can you do that?

Ted Michalos: Well, it can be tough to do. So, get a copy of your credit bureau report. That should list all of the major financial institutions and credit granters, they'll be there someplace. And I'm willing to bet that they'll be one or two items on there that you have no idea what they are. And then you've got to unfortunately ask your spouse, is this real or has the credit bureau made some sort of mistake?

Doug Hoyes:  So, start by talking to both Equifax and TransUnion and if you go to our website at hoyes.com we've got links to how to get your credit report. You can do it for free. It's not something you necessarily have to pay for but figure out where you're at and then I guess that leads then to making a plan to deal with whatever you see.

Ted Michalos: That's right. You have to have a conversation with your estranged spouse. We've got to stop using these joint credit cards, you got to convince them to apply for their own access to credit as well so that the debt doesn’t spiral out of control and that they're taking responsibility on whatever they're spending on a go forward basis.

Doug Hoyes:  And if they won't agree?

Ted Michalos: Then you've got to contact and start shutting things off.

Doug Hoyes:  So, you've got to call the bank and say look I'm not going to be responsible for anything further on this credit card. I know I'm responsible for whatever there's now but nothing going forward.

Ted Michalos: Yep. And, you know, one of the games people play is that they're afraid to well if I start cutting off our access to credit, it's just going to make things worse, there will be no way to reconcile. If they're going to use that kind of lever or threat against you, then I think reconciliation is more complicated than what you're tricking yourself into believing.

Doug Hoyes:  Yeah and ultimately we're looking at this from your point of view. We're trying to protect you, we're not trying to protect your ex, that's not the person we're advising at this point in time. And sure, if you want to help your ex out, if you're ex needs some help getting re-established fine, give them some money then but giving access to an unlimited line of credit, credit cards, a whole bunch of them, is just going to cause you grief in the future.

Ted Michalos: Right.

Doug Hoyes:  And then final comment then at what point do you decide that you need to do a bankruptcy or a consumer proposal to deal with all the debts from the relationship or that have come about since the relationship ended?

Ted Michalos: It's almost always better to sort out the separation or divorce before you file a bankruptcy or a proposal. And the reason for that is once you file the bankruptcy or proposal, you're taking things to the next level. And so, if you haven’t resolved the separation or divorce terms, you've now added a third party to the table. So, it's you, your spouse and your trustee now that are trying to negotiate these things and it'll just make matters worse.

Doug Hoyes:  So, look at the big picture and get that done.

Ted Michalos: Yep.

Doug Hoyes:  Excellent. That's great advice, thanks very much Ted. That was the Let's Get Started segment. I'll be back to wrap it up. You're listening to Debt Free in 30.

Doug Hoyes:  Welcome back. It's time for the 30 second recap of what we discussed today. On today's show Ted Michalos and I discussed how divorce can lead to financial problems and we discussed strategies to deal with debt after divorce. That's the 30 second recap of what we discussed today.

As I said at the start of the show about one in five of our clients said that marital problems were the main cause of their financial difficulties. So, if you're going through a relationship separation, you're not alone. Your number one goal is to protect yourself. So, protect yourself by opening a new bank account in your name only and separate yourself from any joint debts so that your ex is not able to increase your debt without your knowledge. Professional advice is important so get the advice of a good family law lawyer and if you have more debt than you can handle, talk to a licensed insolvency trustee.

About J. Douglas Hoyes

Doug is our co-founder and is a Licensed Insolvency Trustee, Consumer Proposal Administrator, certified Insolvency Counsellor and Chartered Professional Accountant.

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