Spouses in financial hardship want to know how their respective debts will affect each other and how a spouse is, or isn’t, involved when someone files a consumer proposal.
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Understanding joint debts
Before we discuss what happens when one spouse files a consumer proposal it is important to understand how joint debts work.
A marriage or common-law relationship does not make you legally responsible for your spouse’s debts.
You are responsible for the debts that are in your name. Your spouse is responsible for theirs.
If you co-signed or guaranteed your significant other’s debt, then you are equally liable to repay the full debt if your spouse stops making payments.
Many people assume joint debt means they are only required to pay back half the debt. That is not true. If you are joint, you are responsible to repay 100% of the remaining balance. In practice, the defaulting spouse’s creditors will look to the co-singing spouse to continue to make the regular monthly payments on any loan.
Sometimes a supplementary card comes with fine print stating that by using this card you are agreeing to be liable for it. If you have a secondary credit card and your spouse is the primary cardholder, you might be liable for the entire credit card balance. It is best to call the credit card company to confirm your obligations should your spouse stop making credit card payments.
Can creditors come after your spouse?
OK, now that we understand what a joint debt is, what happens if one spouse files a consumer proposal?
A consumer proposal is a legally binding debt settlement agreement, filed with a Licensed Insolvency Trustee, to repay your creditors a percentage of what you owe in exchange for full debt forgiveness. A consumer proposal deals with unsecured debts you are liable to pay. This includes debts you owe and debts you owe jointly with another person.
If you do not have any joint unsecured debts with your spouse, they will not be affected by your filing a consumer proposal. Your creditors cannot contact your spouse for your debts.
Your creditors can contact your spouse if your spouse co-signed or guaranteed the debt. The most common types of unsecured joint debts are lines of credit and credit cards but can also include bank loans, bank account overdrafts and car loans.
If you have joint unsecured debts, then your spouse will be expected to pay that debt off in full even though your debt is being compromised by the consumer proposal. While the filing spouse is protected from further collection actions by a stay of proceedings, the joint spouse is not unless they too file a proposal or a bankruptcy. If you have significant joint unsecured debts, make sure you discuss that with your trustee as it may make sense for both of you to file a consumer proposal. It is also possible for both spouses to file a consumer proposal jointly. A third option is for one spouse to file a consumer proposal and another to file bankruptcy. Your Licensed Insolvency Trustee can provide recommendations on how each spouse should proceed if they both have problem debt.
How is your spouse involved in the consumer proposal process?
There are some ways that your spouse is involved in the process when you file a consumer proposal.
Before you file a consumer proposal, the Licensed Insolvency Trustee will review your current financial situation including your income, your spouse’s income, the family’s expenses, and your assets, including joint assets. This snapshot of your household budget and finances will help determine if a consumer proposal is the right course of action, but also, how much you may be able to afford to repay your creditors and how much your creditors will expect to receive.
Let’s look at this financial assessment of the married couple in more detail to see what is included.
What happens to my spouse and marital assets?
You keep any assets you own in a consumer proposal. You will be required to provide a list of any assets you have an interest in, their approximate value and any debt secured against those assets to the trustee. Your creditors will expect to receive value for any equity in any assets you own as part of the settlement offer.
If you have a jointly owned asset, then only your half or shared interest in the asset will be considered when determining a fair and reasonable offer to your creditors. Remember that in a consumer proposal, you keep your assets but must compensate the creditors for their net value.
Any assets that your spouse owns solely are not considered when you file a consumer proposal unless you recently transferred that asset to your spouse. You will be asked if you transferred any assets in the last 5 years. Any transfer below fair market value is reviewable and can be reversed or adjusted in terms of your proposal settlement. The adjustment would be to account for the difference you would have received had the asset been sold at fair market value. Otherwise, if your spouse owns their own car, has any savings or investments of their own, these assets will not impact your consumer proposal.
A significant asset jointly owned by many couples is often the matrimonial home. To keep your home, you must compensate your creditors for your share in any equity in the home and continue to make all monthly mortgage payments. Consumer proposals do not deal with secured debt like a mortgage. It is not uncommon for the consumer proposal to specifically state that you will continue to pay your secured creditors as outlined in your agreement with them.
If your home is worth less than what you owe, and you can afford your mortgage payments, then there is no equity compensation to be made to the creditors in your consumer proposal.
If you cannot afford your mortgage payments or your home is worth less than you owe, you can walk away from your home. If there is shortfall, the mortgage lender can file a claim in your consumer proposal. In today’s real estate market this is rare but can happen if you have a large second mortgage or home equity line of credit (HELOC) against the property.
Does my spouse’s income impact a consumer proposal?
As mentioned, when you meet with a Licensed Insolvency Trustee, they look at your financial situation including your family income. Your Licensed Insolvency Trustee will ask you to provide your spouse’s proof of income to be able to determine if your household income exceeds a government set threshold. This amount, known as the surplus income limit, is how much income the government feels a family needs to maintain a reasonable standard of living in Canada. It is based on family size and increases annually for inflation.
If you make more than the threshold you are considered to have surplus income. This formula is used when someone files for bankruptcy. However, to ensure the consumer proposal offers more than a bankruptcy, your Licensed Insolvency Trustee will perform a quick surplus income calculation.
If your spouse does not wish to provide their income to the trustee, that is ok, however, that may increase the amount you have to offer in your consumer proposal. If your spouse refuses to disclose their income, your trustee adjusts the surplus income calculation based on government rules. This usually increases the amount of surplus income payable under the Office of the Superintendent of Bankruptcy’s guidelines and thus the cost of your consumer proposal.
Will a consumer proposal affect your spouse’s credit rating?
A consumer proposal that you file will not be recorded on your spouse’s credit report, even if the debt is joint. Your consumer proposal is reported to the credit bureau but only in your name, so it will not affect your spouse’s credit rating nor their credit score.
Remember however, if you have debt that you are jointly responsible for, your consumer proposal deals with your liability, meaning your spouse will have to continue to pay for the joint debt unless they also file a consumer proposal or bankruptcy.
Can you use your spouse’s credit card?
Yes, you can use a supplemental card to your spouse’s credit card while in a consumer proposal. You will want to ensure the nature of the supplemental card.
If you started using a supplemental card prior to filing the consumer proposal, you will want to ensure you are not liable for the credit card debt under the terms of the credit card agreement. If you are liable, that debt will also be listed on your consumer proposal and your spouse will still have to pay for it.
Get advice from a Licensed Insolvency Trustee
If you have questions or concerns about how a consumer proposal will impact your spouse, talk with a Licensed Insolvency Trustee about your specific situation. Every family and personal scenario is unique and requires a custom solution.
Hoyes Michalos offers free, no obligation consultations by phone, video chat or in-person. Contact a local trustee today for help.