Divorce or separation is a common cause of bankruptcy or a consumer proposal for many individuals in Ontario.
It’s not terribly surprising that divorce leads so many people to financial trouble – you move from managing a household budget with two incomes to trying to make ends meet with only one income. Expenses certainly don’t get reduced by 50% just because someone has moved out, so there’s a difficulty in adjusting to the new “normal” of a reduced household income. Add the legal and other costs associated with separation and divorce and you can see why bankruptcy becomes necessary.
Filing for bankruptcy during a divorce or separation can certainly have an impact on the bankruptcy process.
Alimony Payments Not Discharged
A common part of divorce or separation are child support or alimony payments. Filing for bankruptcy does not remove your responsibility to make alimony or support payments, and if you are behind in the payments, filing for bankruptcy does not erase the obligation to pay back alimony payments. However, the amount you pay each month in either child support or alimony is deducted before determining surplus income and calculating your bankruptcy payments.
Joint Debts & Bankruptcy
When separating or divorcing, always keep in mind that you are liable for any joint debts that you may have with your ex. Just because you didn’t use the joint credit card doesn’t mean you aren’t responsible for the debt. Banks will hold each of you fully responsible for the entire debt (meaning you can’t agree to split the debt). What this means is that if you file for bankruptcy and there are joint debts, the bank is likely going to pursue your former spouse for the entire balance of the debt. A divorce decree or separation agreement cannot erase a joint debt obligation.
If, as part of your separation you’d like to try to “split” your debts, you would have to get the bank to formally agree to this – usually by way of the bank issuing two new separate loans to pay off the joint loan. Banks do not have to agree to this, and may not.
Assets & Equalization Payments
This is where bankruptcy and divorce or separation issues become a bit more complicated. A few things to talk to your trustee about:
- Unlike alimony and support, under current law equalization payments (where you agree to pay back a spouse because you retained certain assets) are eliminated by filing bankruptcy.
- Determining ownership of assets in a divorce and bankruptcy is based on the timing of each. If bankruptcy occurs first, your assets become part of your bankruptcy estate and are no longer available to distribute in a divorce. If you are divorced first any assets transferred in the divorce are not available to the trustee (as long as the transfer is not considered a fraudulent transaction).
Always talk to your bankruptcy trustee about any possible joint debts or outstanding divorce costs to see how they will affect both yourself, and your ex-spouse, when filing bankruptcy.