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Bankruptcy and Divorce: Financial Problems After Divorce

Financial problems are the biggest cause of marital break down.

Marital problems are the biggest cause of bankruptcy.

The first statement is self-evident to anyone involved with family law or marriage counselling. The second statement may not be so self-evident. The costs of marriage break down are extensive; existing debt, disputes over division of marital assets, mounting legal fees, lost time from work, lost wages, emotional trauma etc. In addition, there are the costs of maintaining two households, costs of childcare that were previously shared, disputes over who pays which bills; all with the same incomes that you had when you were together.

If one spouse does not have the resources to deal with the problem, they may go bankrupt. The spouse considering filing an Assignment in bankruptcy does not need the consent of the other spouse. This can be just as well in that often times these relationships deteriorate to the point where their mutual lawyers are the only ones that talk. Many family debts are “joint and several.” This means that the creditors can go after both or either debtor to collect the outstanding amount. If one spouse does not pay (or goes bankrupt) the creditor can go after the non-bankrupt spouse for the entire amount. This will result in the creditors going after the remaining spouse for all of the joint bills. Once this happens the remaining spouse may be shocked to receive a call from a debt collector or when they receive a Statement of Claim in the mail for the unpaid debt, especially if they believed that they had split the debts in the same fashion as they had split their marital assets. They will find themselves responsible for these debts notwithstanding the previous agreement. This will often result in that spouse filing an Assignment in bankruptcy as well.

The timing of the filing of an Assignment in bankruptcy will vary depending upon the individual circumstances. However, one might be in a better position to assess the problem after the issues of marital property and spousal/child support are dealt with. That being said, it may not be possible to wait until proceedings are completed. Should your creditors have judgments and garnishment orders, waiting to file the Assignment does not make sense, in which case you will want to speak with a Licensed Insolvency Trustee. The trustee will then stand in your shoes in dealing with the assets of the estate. When speaking with your family law lawyer with regard to the division of marital property you should be aware of which assets are exempt from seizure in a bankruptcy situation, such as pensions, some RRSPs etc. and which are not, such as your free and clear boat, camper or snowmobile.

Outstanding spousal or child support debts are not discharged in bankruptcy. That is, they will still exist after one is discharged from bankruptcy and the creditor can continue to collect. The Courts have held that, where the Courts’ have awarded legal costs to the party successfully obtaining such orders – those costs are part of the order, and likewise not discharged in bankruptcy. However, legal fees which have accumulated through the divorce process (other than for support) can be discharged. Claim for support proven in a bankruptcy have a special standing, in that they may have preferred status among the filed claims. This is to say that it is possible that these claims will be paid first from any realizations in the estate by the trustee.

Going through a marriage breakup is generally an emotional time in one’s life. Often times we will see one spouse sign over everything to other spouse to make things easier, or agree to take on all of the debt, when that really isn’t possible. In that certain, court orders in family court can have serious, long-term effects, even after bankruptcy, it is essential to get competent legal advice.

To learn more about managing your debt after divorce or information about bankruptcy and bankruptcy alternatives, visit www.bankruptcy-canada.ca and schedule a free consultation with a licensed bankruptcy trustee.

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