If your marriage is soon to be over and you are struggling with debt, you may be looking to build a new start by dealing with both your legal separation and options to deal with your debt. In this situation, I am often asked, ‘Should I file a bankruptcy or consumer proposal before or after divorce?’ Financially, the answer depends on which spouse has the debts and how the timing of a bankruptcy or proposal can affect your marital assets.
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What happens to marital assets in a divorce?
First, let me explain how bankruptcy law and divorce can affect your marital assets.
When you file bankruptcy, any assets you own are surrendered to the Licensed Insolvency Trustee to be sold, and the proceeds are then distributed to your creditors to satisfy your debt.
If you file bankruptcy before your divorce or separation is finalized, your assets will no longer be available to divide between spouses in the divorce.
One of the most significant decisions to make in a divorce is if one spouse will be living in the marital home or if it will be sold as part of the process perhaps because the home is too expensive for either spouse to maintain. Filing bankruptcy before the divorce is finalized can limit your ability to control what happens to the property. That’s because, if there is equity, the ownership that belonged to the bankrupt spouse now vests with the trustee.
An alternative can be to file a consumer proposal to protect the filer’s share of any equity.
In a consumer proposal, you keep all your assets. Instead of filing bankruptcy, you negotiate a settlement amount with your creditors to repay a portion of what you owe over a period of up to five years. If you file a consumer proposal the marital home remains yours to be distributed when you divorce. However, you are still required to list any assets you own when you file a consumer proposal. Your creditors may want you to pay more because they feel they are entitled to the value of that equity.
If you have substantial property, the solution may be to wait to file a bankruptcy or consumer proposal until after your divorce or separation. If the property is transferred from one spouse to another as part of a family order, legal separation agreement or formalized divorce degree before filing bankruptcy, the property no longer belongs to the potential bankrupt and is now out of reach of the trustee. The separation agreement must be legitimate and not seen to be done for the sole purpose of hiding assets from your creditors.
What happens to joint debt?
You and your soon to be ex-spouse are not liable for each other’s debts unless you’ve co-signed the debt. If this happens, they become a joint debt.
In some cases, there will be agreements between divorcing spouses that one will become responsible to maintain the payments on certain marital debt, for example outstanding credit card debt. It’s important to note that while this may have standing in family court, the creditors who are owed the money don’t have to follow a family court order. If your spouse files bankruptcy, even after your divorce is finalized, you could be liable for a joint debt, even though your spouse agreed to pay it. To make sure you are absolved from any liability to repay joint debts, the creditors must agree to remove you from any loan agreement before the other spouse files a bankruptcy or consumer proposal.
A bankruptcy or consumer proposal does not deal with secured debt so it will not affect your mortgage payments if you keep your home, beyond what you agree to in the divorce agreement.
Income, support payments and surplus income
When you file bankruptcy, any income over a certain limit will trigger what is a called a surplus income payment into your bankruptcy to compensate your creditors. If you file bankruptcy before your divorce, your spouse’s income can affect this calculation and increase the cost of your bankruptcy or consumer proposal.
If you file bankruptcy after your divorce, any alimony or child support payments you make can be deducted from your income before surplus is calculated, so in some cases it can be worth waiting until after the divorce for support to be determined.
If you are receiving alimony or child support payments, these payments will be added to your income for bankruptcy purposes.
When should you file a consumer proposal or bankruptcy before divorce?
It is always important to discuss your specific situation with your spouse, Licensed Insolvency Trustee and divorce lawyer, however, here are some reasons why you may want to file bankruptcy before you finalize your divorce:
- You have significant joint debts, and it makes sense for you and your spouse to clear up those debts before finalizing your divorce settlement. It is possible to file a joint bankruptcy or joint consumer proposal to eliminate the unsecured debt for both spouses. It’s also typically less costly to file together as opposed to doing it apart. This could also make life easier for both of you in a very difficult time.
- You are being threatened with a wage garnishment or seizure of assets by your creditors. Filing for bankruptcy or a consumer proposal can stop creditor collection actions, while you work to finalize your divorce.
When should you file for divorce before bankruptcy?
The main reasons to complete your divorce proceedings prior to filing a bankruptcy or consumer proposal is to provide more flexibility in dealing with marital assets. It may make sense to complete your divorce proceedings first if:
- you wish to transfer certain marital assets as part of the equalization process,
- your soon to be ex-spouse earns a much higher income than you do,
- you will be paying high alimony or support payments that could reduce your potential surplus income,
- your personal or emotional situation warrants completing your divorce ahead of any other considerations.
Can couples file bankruptcy together after divorce?
Divorced couples are still allowed to file a joint consumer proposal or joint bankruptcy to get relief from their combined debts. It is not uncommon for separated couples to find themselves no longer able to repay debts they could manage while married. Divorce changed their financial circumstances. Divorce costs can lead to divorce debt and operating two homes can significantly reduce the amount of monthly income available to repay old marital or joint debts.
To determine whether a joint consumer proposal or bankruptcy is the best way to go, both spouses should contact a Licensed Insolvency Trustee to get an assessment of their individual financial obligations.
If you need to file for divorce and bankruptcy, it is very important to talk to a divorce attorney and a Licensed Insolvency Trustee before filing for either one. The decision as to whether to file bankruptcy or divorce first should be made based on what’s best for you at the time. If you need further advice about the timing of your bankruptcy vs your divorce, contact us for a free consultation. We’re here to help.