Filing for Bankruptcy After Divorce Is Final
June 23rd, 2022 by A Licensed Insolvency Trustee
It’s a common enough situation – in the midst of financial upheaval, a couple decides to divorce. The money woes may have contributed to the marital break-up – or vice versa. Either way, it’s a double-whammy of heartache and uncertainty about the future.
Like other aspects of divorce, the financial side requires close attention, as do self-care and the care of dependents. Emotions should be set aside, if possible, while you consider next financial steps.
Bankruptcy and Divorce: Why Timing Matters
The timing of a consumer proposal or bankruptcy filing is of great importance when it coincides with a marital break-up. It is important to assess which individual in the couple has a greater level of debt, and whether both partners are jointly responsible for any debts. Also, the couple may be joint owners of a home. Does either partner wish to keep the house? These factors and more come into play, and wise decision-making is key.
Bankruptcy before divorce
Are you and/or your spouse being harassed by creditors? If so, it is important to know that once you file for bankruptcy or consumer proposal, all contact with you by your creditors must cease by law. Garnishments, lawsuits and the payment of judgements will end, for all unsecured debts accrued before the filing. This can be a great relief and can give you some breathing space to sort out the future of your relationship.
- An unsecured debt is a debt that has no collateral posted against it. Examples of unsecured debts are most credit cards, payday loans, personal loans, etc.
In some cases, it makes sense to file for bankruptcy before a divorce is filed. Total costs of a bankruptcy or consumer proposal are lower if a couple makes a joint filing rather than independent filings, and this may be more practical before the separation is complete.
Be careful with filing for bankruptcy before a divorce if either partner wishes to retain a home you shared. Homes are typically forfeited in a bankruptcy, and once bankruptcy is declared, any equity the bankrupt spouse may have had in the property becomes part of the bankrupt’s assets, under the control of the Trustee handling the bankruptcy.
Bankruptcy after divorce
Sometimes it happens that splitting with your spouse is your priority – and theirs as well. In this case, getting the divorce completed as soon as possible may help you sort out your finances once you are clear of your former marriage, and might be the best course.
Do you expect to be paying your former spouse support or alimony payments after your divorce? This is a scenario in which it may make sense to wait to file for bankruptcy or consumer proposal until after the divorce, as these payments are taken into account when assessing your income, which then affects the payments you may have to make towards your bankruptcy or consumer proposal.
Bankruptcy, Divorce, Joint Debts and Joint Filings
Joint debts – those which both spouses are responsible for paying – can be the source of some surprises in separation and divorce.
Often, a spouse is not (or is no longer) aware that they share responsibility for their partner’s debt. This is especially true with credit cards. If one spouse applied for a card for the other spouse at the time the account was opened, then the other spouse is jointly responsible for the debt, even if they never used their card. This responsibility remains, even after a divorce is finalized.
If there is a lot of joint debt and both partners are insolvent, sometimes it makes sense to file for bankruptcy or consumer proposal jointly – even after the divorce is finalized. This is more common than you might think, but when you consider that divorce is one of the most common causes of insolvency, it begins to make sense.
Filing for bankruptcy or consumer proposal jointly only works well if the partners still get along well enough to agree to a plan and follow through. This is because, in a joint filing, if one partner fails to pay their share of the payments, the other partner will become responsible for paying that portion.
Consumer Proposal as an Alternative to Bankruptcy
We’ve mentioned consumer proposal alongside bankruptcy frequently in this article. Few people realize this, but more Canadians file consumer proposals every year than file bankruptcies.
Consumer proposal is not “another form of bankruptcy,” but is an entirely different insolvency solution, wherein the Trustee approaches your creditors with a reasonable repayment plan (typically a monthly payment for five years). The creditors decide whether to accept the proposal. When the payment plan is fulfilled, the debts are extinguished and you start your financial life fresh.
Consumer proposal carries the same legal protections from creditors as does bankruptcy. And, a great advantage of a consumer proposal is that, if your financial circumstances change for the better, it can be paid off early.
On the downside, consumer proposals are more expensive than bankruptcies, as they typically last longer.
It’s Complicated, but a Trustee Can Help
As described above, there are many ins and outs concerning divorce and bankruptcy. If you are suffering insolvency problems and are also in the process of ending your marriage, you need the advice of a divorce lawyer and a Licensed Insolvency Trustee.
A Licensed Insolvency Trustee is the only professional who can file the paperwork for consumer proposal or bankruptcy with Canada’s Office of the Superintendent of Bankruptcy. Licensed Insolvency Trustees (or LITs) are specially trained in all aspects of consumer insolvency and its solutions.
Your first consultation with an LIT is confidential, no-obligation, and free of charge. The information you will receive will reassure you that your debt situation can be solved, and your credit rating eventually restored with a few simple steps. Your future is waiting – contact a Licensed Insolvency Trustee in your area today!
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