Family law and bankruptcy law frequently overlap and the effect can be quite complicated. Our Bankruptcy and Divorce Canada fact sheet will answer some key questions you may have however it is always important that you talk to your bankruptcy trustee about your specific situation.
How Does Bankruptcy Affect Alimony & Maintenance or Support
Bankruptcy does not discharge outstanding alimony or child support payments in Canada pursuant to section 178 (1)(b) the Bankruptcy & Insolvency Act.
The spouse owed back support payments can make a claim in the bankruptcy and receive their share of any ‘dividend’ paid from the estate. Any alimony or support arrears for the 12 months prior to the date of bankruptcy are considered a preferred claim and are paid out of the proceeds of the bankrupt estate before any other unsecured claims. The balance left unpaid is still owed by the paying spouse.
Unpaid debts due to equalizaton payments under the terms of a divorce or separation agreement are treated like any other unsecured debt and are eliminated by filing bankruptcy.
Do Support or Alimony Payments Affect Surplus Income?
Support and alimony payments are deductible for purposes of calculating surplus income. This potentially lowers your net income, reducing any surplus income payment you may be required to make in a bankruptcy.
Filing for Bankruptcy During Divorce
Whether you file bankruptcy before or after your divorce is finalized affects whether your creditors will be entitled to any assets that may be part of our divorce agreement.
If you file bankruptcy before your divorce is final, your assets transfer to your bankruptcy estate and are no longer available for distribution in a divorce.
Alternately, if you finalize your divorce before bankruptcy and assets are transferred to an ex-spouse as part of a Family Court Order or legal separation agreement before you file for bankruptcy (assuming not done fraudulently) then these assets are no longer available for your creditors in the bankruptcy.
What Happens To Joint Debts After Bankruptcy?
A joint debt cannot be eliminated by a divorce or separation agreement. That means that, no matter what your divorce or separation agreement says, debts that were owed by both you and your spouse before the divorce, will still be considered joint debts after the divorce. If one spouse files bankruptcy, the creditors can, and will, pursue the ex-spouse for payment of a joint debt regardless of what you agreed to in the divorce.
To eliminate a joint debt, your lender must agree to remove one spouse from any debt they co-signed or guaranteed. This includes joint credit cards.
How To Deal With Debt Problems In A Divorce Situation
A divorced or separated couple can still file a joint bankruptcy or joint consumer proposal to eliminate combined debts. This is not uncommon as a method of dealing with joint debts owed by a couple who can no longer repay these debts due to their divorce and a change in their financial circumstances.
Whether a bankruptcy or consumer proposal makes sense for you, or your ex-spouse requires an assessment of each of your individual financial obligations. Talk with a local Licensed Insolvency Trustee, either together or separately, to find the right solution when one, or both of you, cannot repay your pre-divorce debts.