Filing for bankruptcy is a difficult decision to come to. There are many factors to consider when determining if it’s the right option for you. When you’re married or in a common-law relationship, debt problems become more complicated. Filing bankruptcy as a married person or common-law partner has its own set of concerns that must be considered.
In this article, we will look at some of these important considerations when filing for bankruptcy as a married person or common-law partner. Read on to learn about claiming bankruptcy when married.
“Spouse” Definition In an Insolvency Proceeding Like Bankruptcy
One of the first questions a Licensed Insolvency Trustee will ask you is your marital status. While this is easy for those that are legally married, single or divorced, etc. it can seem a little grey when you have lived with someone for a while but have not been legally married.
A spouse, for the purposes of this article and when you file a consumer proposal or bankruptcy, is a husband or wife or a common-law partner. Most are familiar with the terms husband and wife, however, sometimes people misunderstand what a common-law partner is.
The Bankruptcy and Insolvency Act defines a common-law partner as:
“A person who is cohabiting with the individual in a conjugal relationship, having so cohabited for a period of at least one year”
And without complicating things further, a conjugal relationship essentially means a marriage-like relationship.
This means that even if you do not file your taxes as common-law you are still considered common law if you live in a conjugal relationship and have done so for at least a year with another individual. It should also be noted that CRA defines the relationship in the same way and so if you meet the above definition you are supposed to file your taxes as common-law and advise CRA of any change in marital status.
Will My Spouse Be Impacted If I File For Bankruptcy?
This is the most common question we hear from individuals who are thinking of declaring bankruptcy themselves.
In general, the answer is no. And this is true even if you have been bankrupt before. However, there is some nuance that comes into play when you have joint assets or debts with your spouse.
The two major concerns as it relates to whether or not a spouse will be impacted are if there are:
- Joint assets between you and your spouse; and
- Joint debts between you and your spouse.
We will cover these individually in depth. However, when you look at filing an insolvency a Licensed Insolvency Trustee will work with you to understand your debt options as well as the potential impacts to you, your spouse, and any other parties that may be impacted by your filing.
What Happens To My Joint Assets in Bankruptcy
The impact that bankruptcy has on any joint assets you have depends on the type of assets and any secured debt that may be secured against the asset.
Typically speaking, joint assets fall into one of three categories:
Exempt assets are assets that fall under provincial and federal legislation and are, as the name of them implies, exempt from anyone touching them or seizing them if you file an insolvency proceeding. Some examples are:
- A vehicle if it has no loans secured against it and is worth less than $6,500; (this amount varies among the Provinces)
- An insurance policy as long as it has a designated beneficiary; and
- Household goods & personal effects.
There are of course limitations and many others that your Licensed Insolvency Trustee will cover with you as they relate to your situation.
Assets that are secured above their value
If you have an asset that has a secured loan against it that exceeds the value of the asset then it likely has no realizable value in bankruptcy, even if it does not fall into any exemption. The most common example is vehicles – they often have loans secured against them that far exceed the value of the vehicle.
If an asset doesn’t fall into one of the other two categories it is possible that it may be realizable in a bankruptcy. This doesn’t mean you will necessarily lose the asset. However, it may impact the amount of money you have to pay into your bankruptcy.
Joint Realizable Assets in Bankruptcy
When an asset is realizable (see above) and it is jointly held there are typically three options that you have:
You can buy back the asset
You can buy your share of the asset from your Licensed Insolvency Trustee. For example, if you have a house that is jointly owned and it has a total of $20,000 of realizable equity, you can pay $10,000 to the trustee to buy back your share of the asset. The funds will be distributed to your creditors as part of your bankruptcy estate. Fear not, asset buybacks usually form part of your monthly payments so you usually do not have to come up with the funds all at once.
The joint owner can buy back the asset
The joint owner of the asset also has the ability to buy back the asset from your trustee. If they do this, they now become the full owner of the asset.
The trustee can sell or register a lien against the asset
Another option is that the trustee can sell the asset and pay the proceeds to your creditors. In the event the co-owner does not wish to cooperate the process is more complicated than a normal asset sale where the debtor exclusively owned the asset.
It requires the trustee to apply to Court for a Partition & Sale of the asset. Because this can be a cost-prohibitive avenue to take the trustee also has the ability to simply register a lien against the asset.
This lien will prevent the asset from:
- being sold or transferred without the lien being paid in full; or
- refinanced without the lien being paid in full.
Of course, in the event the trustee sells the asset or registers a lien it only entitles the trustee, and ultimately the creditors, to the share of the proceeds that belonged to the debtor. EI: If the house is owned three ways (husband, wife, parent, for example) and one of them files, the trustee would only be entitled to 1/3 of the equity.
What Happens To My Joint Debts in Bankruptcy
The effect bankruptcy has on joint debts is the same whether or not they are secured or unsecured.
The overwhelming majority of jointly held debt (debts that are co-signed with another person) is considered to be jointly and severally liable. This means that both parties to the debt are jointly and individually responsible for paying back 100% of the debt.
As a result, if one person files for bankruptcy, the other person is still fully liable for repaying the entire debt. The creditor cannot look to the bankrupt debtor for repayment but they can certainly continue to pursue collection action against the non-bankrupt debtor.
This doesn’t mean that the co-signer’s credit rating or credit report will be negatively affected. As long as the co-signer makes the payment on the account they will not be negatively impacted.
What Happens To My Spouse’s Income in Bankruptcy
Thankfully, nothing happens to your spouse’s income in bankruptcy. Your trustee will likely ask for information on your spouse’s income but it will not impact their income in any capacity.
The trustee needs this information to ensure that your monthly expenses are accurate. The more accurate your monthly expenses are, the easier it will be to develop a reasonable budget during your bankruptcy.
Your spouse’s income cannot be garnished as a result of your bankruptcy and their wages cannot be impacted in any way.
Your Spouse Is Not Required To Provide Your Licensed Insolvency Trustee Information… But It May Negatively Impact You
When you file for personal bankruptcy the trustee will ask for your household’s income, which will include your spouse’s income and any other income earners in the household.
Your spouse is not required to disclose their income to your trustee. Do note, however, that this can negatively impact you especially if they make less income than you do. This is because the surplus income guideline as set out by the Office of the Superintendent of Bankruptcy gets cut in half if your spouse refuses to disclose their income. This can cause your surplus income obligation to increase.
Other Common Questions
Does my spouse’s credit rating get affected?
No – as long as any debts that are co-signed with them are continued to be paid there will be no negative effects on your spouse’s credit rating or credit report.
If I file for personal bankruptcy do I have to provide my spouse’s information?
The only information that you must provide about your spouse is in regard to any joint assets and joint debts that you may have with your spouse. The trustee will also require your spouse’s income information at tax time so that the income can be reported on your income tax return.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.