Is your partner’s debt becoming unmanageable? Have they started looking for solutions that will solve their financial problem? Credit counselling, or often filing for Bankruptcy or a Consumer Proposal might be options they are exploring. So, what happens to you if your spouse declares Bankruptcy? And what about other aspects of your finances, such as your bank accounts, credit rating, and assets?
Will my Spouse’s Bankruptcy affect me?
You may assume that if you’re married or legally common-law, you are liable for your spouse’s or partner’s debt. The good news is that this isn’t true unless you have joint debt. In that case, you would have had to sign credit agreements to be added as a borrower or co-signer.
Filing for Bankruptcy will release your partner from their debt obligations. However, their credit rating will be negatively affected for six years after they are discharged from Bankruptcy. Any assets not exempt from Bankruptcy proceedings can be seized and sold, or the creditor can put a lien on the asset. If the creditor puts a lien on the asset, proceeds from the asset’s sale will go to the creditor to be put towards unpaid debt.
Your spouse’s Bankruptcy can impact your finances in the following ways:
- You’ll be responsible for any joint debt you have with your spouse.
- Your bank accounts can be affected if they’re joint with your spouse.
- Your credit rating could decline.
- You could find it hard to borrow going forward.
When you file for personal Bankruptcy, you are insolvent, meaning you owe more than you can pay. If your spouse is insolvent, you’ll be responsible for making payments on the debts you have co-signed. Making payments intended to be joint or your spouse’s responsibility can cause additional financial stress for you.
You’ll have joint debt if you were a co-borrower or co-signer for your husband, wife, or partner, and the debt hasn’t been paid off. Often, lenders require both incomes to approve you for loans for significant purchases for the payments to be affordable.
With skyrocketing prices for homes, vehicles, and other major purchases, having joint debt is a fact of life. Both parties are fully liable for the debt when a loan is joint or has a co-signer.
If your spouse files for Bankruptcy, they’ll be relieved of their obligation to repay the loan, but you won’t be. You’ll still need to make payments since you are equally responsible for the loan.
A separation or divorce won’t relieve you of joint debt obligations either, even if the debts were your spouse’s. You must still pay joint debts if you separate or divorce and your ex-spouse declares Bankruptcy.
Your credit rating
Your spouse’s Bankruptcy filing won’t affect your credit rating if none of the debts are joint with you. However, their credit rating will drop to R9, which is the lowest credit rating on a credit report. It will remain that way for six years after the Bankruptcy is discharged.
If you have joint debt with your spouse, your credit rating can be affected because you’ll be responsible for making the payments or if you co-signed for your spouse’s debt. Filing for Bankruptcy relieves your spouse of the obligation to pay those debts. However, the debts you have signed as a co-borrower – you will now be responsible for making those payments.
Filing for Bankruptcy jointly is an option for you if you aren’t able to manage the payments. Couples sometimes do this to eliminate their debt burden and because it costs less to file jointly than for each person to file separately.
Your spouse’s poor credit rating can affect you if you need to borrow in the future. Your spouse will have difficulty being approved for credit at reasonable rates until the Bankruptcy is no longer on their credit report. If you need to borrow during this time, you will probably have to apply without your spouse. This can often delay your goals if you need their income to qualify for the money you want to borrow.
If your bank accounts are joint, your spouse’s Licensed Insolvency Trustee will review your accounts to see if there are any funds available. If there is any money in the account, the LIT will determine if any of it will be distributed to your spouse’s creditors. Some of the money in the account could be used to pay your spouse’s creditors.
If you have a joint account with your spouse that’s overdrawn – when your spouse files for Bankruptcy, you’ll be responsible for paying the account’s overdraft.
The assets solely in your name will not be affected by your partner’s Bankruptcy. Your spouse’s LIT and creditors will only be interested in assets that belong to your spouse or are joint.
All Canadian provinces provide asset exemptions for Bankruptcy filings. However, non-exempt assets can be seized for payment to creditors.
One of the most common joint assets that creditors lay claim to is the marital home. Canadian law allows you to keep a certain amount of equity in your home if you file for Bankruptcy. If your spouse’s equity in your home is greater than the exempt amount, the house can be sold to pay creditors. Only your spouse’s equity portion will be distributed to their creditors so you will keep your share of the equity, but you could lose your home.
Are you considering filing a Bankruptcy but wonder how it will affect your partner? This podcast explains the difference between personal and joint debt and what happens to your spouse.
Where to Get More Information
It can be overwhelming to deal with debt and find the best option to get your finances back on track. The LITs at Allan Marshall and Associates will answer questions regarding your debt options if you or a loved one are having financial difficulties.
We have offices in Alberta, British Columbia, New Brunswick, Nova Scotia, and Prince Edward Island to serve you. Please contact us today at 1-888-371-8900 for a free consultation to get the best solution for you and your spouse, so you can get a fresh start.