As Licensed Insolvency Trustees (formerly known as Trustees in Bankruptcy) we often receive questions from the spouse or common-law partner of someone who is considering filing for bankruptcy. Along with wanting to be supportive of their partner’s financial rehabilitation, they often have a range of concerns about how a bankruptcy will affect their own financial standing, credit or assets. Read on to help clear the air around some frequently asked questions you may have about your spouse filing for bankruptcy:
If my spouse files bankruptcy will I be bankrupt too?
Simply put – NO! One person filing for personal bankruptcy does not automatically assign their spouse into a bankruptcy, full stop.
If both you and your spouse share the same joint debts or each have your own separate debts that you’re unable to repay, you may both decide to start a bankruptcy at the same time, but this is your decision – not a requirement in the law.
Sometimes one spouse may be in a position to repay a portion of their debt, but the other spouse is unable to afford any repayment – in this situation one spouse may decide to file a Consumer Proposal and the other a personal bankruptcy.
What is a Consumer Proposal?
A Consumer Proposal isn’t the same process as bankruptcy. A Consumer Proposal is a specialized debt consolidation tool you can access by working with a Licensed Insolvency Trustee. Essentially your consolidated debts are reduced down to what you can afford to repay (you may repay as little as 20-50% of your total debts with no interest), with the unpaid balance being forgiven (written-off) by your creditors. Learn more about Consumer Proposals here.
Will I be responsible for my spouse’s unpaid debts if they go bankrupt?
The act of marriage (or common-law marriage) on its own does not give your spouse’s creditors the right to demand payment from you for your spouse’s unpaid debts if they file bankruptcy.
You will not be responsible for repaying the creditors for the debts eligible to be discharged unless you have co-signed on the debts included in your spouse’s bankruptcy. In the event that there was a co-signer on the debts then the responsibility of repayment would then fall to that person. A spouse could also wind up liable for credit card debt if they used a supplementary card with their own name on it.
How will my credit be affected if my spouse files for bankruptcy?
If the debts included in and forgiven under your spouse’s bankruptcy belong solely to your spouse then your credit score and history is not affected by their bankruptcy proceeding.
How Long Does Bankruptcy Stay on a Credit History?
A bankruptcy will be reflected on credit history for 6 years, but it is possible to apply for and obtain new credit within as little as two or three years (sometimes even less). Many people who file bankruptcy go on to successfully get a new credit card, mortgage or vehicle financing within just a few years of bankruptcy discharge / completion.
Does the Licensed Insolvency Trustee seize my assets during my spouse’s bankruptcy?
As the spouse of a bankrupt individual, separate assets you own solely are not of interest to your spouse’s bankruptcy estate or Licensed Insolvency Trustee.
It’s important for both you and your spouse to know that filing a bankruptcy does not mean a person automatically loses assets. In BC there are a number of assets that can be claimed as exempt from seizure and are therefore “safe” from creditors – in fact, the majority of individuals filing for bankruptcy will retain all their assets.
Sometimes if a person believes that a bankruptcy filing is going to happen soon they may consider selling or transferring their assets to shield them from creditors – generally this is not advisable, and it’s often unnecessary due to the provincial asset exemption laws. If there have been assets transferred prior to filing for bankruptcy the Licensed Insolvency Trustee may be required to inquire and report on the specifics of the transaction.
What happens to my income when my spouse does a bankruptcy?
Income that you earn during the period of your spouse’s bankruptcy (which is normally either 9 months or 21 months in total) is your own and continues to be paid to you as usual.
Your spouse will be submitting a monthly budget form as part of their bankruptcy, detailing the household’s income and expenses. These budget forms are used to determine something called “surplus income” which dictates how much money your spouse needs to contribute towards their bankruptcy, and also how long the bankruptcy period will last. These amounts and timing will be discussed and estimated in detail before the bankruptcy process officially begins, so unless the household situation changes drastically a bankruptcy is normally a “no surprises” proceeding.
While the bankrupt person is required to report and verify the income and expenses of the household and may be required to pay surplus income, as their spouse you are not expected to pay any portion of your income, as it is not your bankruptcy. A non-bankrupt spouse can refuse to disclose their income should they choose to do so, although this will impact the bankrupt person by resulting in a reduced income standard being used to calculate their surplus income.
Despite sharing a household, in a bankruptcy a couple’s finances are quite separate. If you or your spouse are considering bankruptcy as a debt solution, it can be a good idea to bring your other half along during your first meeting. There can be quite a lot of information to be discussed and not only is it helpful to have a second set of ears, it also gives you both an opportunity to ask questions you may have and get your concerns addressed without delay.
Bankruptcy is a legal process most people are unfamiliar with and it can feel overwhelming not knowing where to start – the Licensed Insolvency Trustees and Estate Managers at Sands & Associates are here to help you.