In a recent study one out of every seven people who declared bankruptcy in Canada listed separation, divorce or marital breakdown as a contributing factor to their financial problems.
The cost of divorce goes beyond the emotional toll and legal bills. When you are together you have two incomes, but only one set of expenses for rent, utilities and other living expenses. As the saying goes, “two can live as cheaply as one.” When you separate, your income usually remains the same but you now have added living expenses. You are operating two households, perhaps eating out more and can no longer share the costs.
Filing for bankruptcy during or after a divorce can make the process a little more complicated. While the two events are separate, divorce and bankruptcy have an impact on each other.
Divorce and Joint Debts
If you are separated or divorced and have debt, you should be aware that you are fully liable for any joint debts.
If you and your ex-spouse have a joint credit card or line of credit for $10,000 before the separation, you cannot agree to split the debt say “50-50” or $5,000 each. From the bank’s point of view, that’s not correct. You are both liable for the entire $10,000 debt.
If you file bankruptcy to eliminate those debts your creditors can’t look to you to collect but they can, and probably will, pursue your ex-spouse for the full balance.
One option if you are separating and have joint debts is to contact your bank and ask them to create two new loans, one in each of your names, to pay off the old debt. That way you both know exactly what you are agreeing to pay. Your bank doesn’t have to agree, but it’s worth asking and depending on how you split your household assets you might be able to work something out.
If you and your ex-spouse are unable to pay the debt, both you and your ex-spouse may have no option but to file a consumer proposal or declare bankruptcy. It is not unusual for both spouses to have to file to deal with their pre-separation debts.
Bankruptcy Doesn’t Eliminate All Divorce Debts
Bankruptcy does not eliminate alimony or child support. Your divorce or separation agreement may require you to make support payments in exchange for having kept certain assets in the divorce. If you declare bankruptcy you will lose those assets but will not be able to eliminate any debts related to your support payments.
Talking To An Expert Can Help
If you are in this situation, you should consult a trustee, and your family law lawyer, to review all of your options. They can help you decide if you should both file for bankruptcy or if a consumer proposal for either spouse is your best option to eliminate your divorce debts and move forward without the burden of those debts.