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As a trustee in bankruptcy*, I am often asked about the impact of bankruptcy on the spouse. Generally speaking, a person in Canada can go bankrupt without any consequence on the spouse. Your personal debts concern only yourself, and no one else can be held responsible for these liabilities. However, the situation becomes more complicated if your couple has joint debts.

Joint debts

You’re going to file for bankruptcy and have joint debts. You must know that bankruptcy will not clear 50% of your joint debts (your part), and therefore allow your spouse to reimburse only his or her part. In such a case, your spouse will be required to reimburse 100% of the joint debts since you are both jointly and severally liable for these.

The most common joint debts are lines of credit, joint personal loans and joint credit cards, as well as mortgages and car loans.

Joint bank accounts

If you have a joint bank account with your spouse, money deemed to be yours will be seized. It will be up to the trustee in bankruptcy to determine how much is yours and how much belongs to your spouse. If there is a mistake and your spouse’s money is seized, it will be possible to oppose such a measure. Your spouse will need to demonstrate that it is actually his or hers.

Assets

Here again, the trustee in bankruptcy will be responsible to separate assets belonging to the couple from the one exclusively owned by your spouse. Should the trustee in bankruptcy seize some of your spouse’s property, it will be possible for him or her to oppose such a measure.

Some assets may be exempt from seizure. Each province’s legislation determines the maximum value and type of personal property that is exempt.

On the other hand, the assets belonging to your spouse and yourself that exceed the maximum exempt value could be sold under your bankruptcy procedure. Your spouse may then lose some property in this context. He or she would however get back their share of the proceeds.

Suppose, for example, that your couple owns jointly an art collection worth a total of $15,000. This collection could then be sold. The proceeds of the sale would be separated into two equal parts of $7,500 each. One would be allocated to the bankruptcy estate and the second would be paid to your spouse.

House

There are three most common scenarios if your house is owned jointly. Each one has a different impact on your spouse.

  • 1st scenario

    If there is no equity on the house, it may be possible to keep it without having to disburse a single cent to the bankruptcy fund. There is then no impact. Nevertheless, you must keep making the mortgage payments.

  • 2nd scenario

    Your spouse can prevent the house from being sold. To do so, he or she needs to pay the trustee in bankruptcy the equity approved by the creditors. The value of the house and the mortgage balance affects the equity amount.

  • 3rd scenario

    The spouse cannot pay the amount required by the trustee to prevent the house from being sold, or he or she does not want to do so. The house is then sold and the proceeds of its sale are shared between the bankruptcy estate and the spouse.

Borrowing capacity

Another often forgotten impact of the bankruptcy on the spouses is the reduction of their borrowing capacity. Filing for bankruptcy will negatively affect your credit rating. For some time, it will be harder to get loans as a couple. Your spouse will still be able to borrow, but his or her capacity to do so will probably be lower than what it would have been if the two of you had been able to borrow together.

Collection agencies

If you have to file for bankruptcy, collection agencies may threaten to switch the responsibility of your debt to your spouse. Although unlikely, it does remain a possibility given that collection agencies are sometimes very aggressive.

However, unless they are joint debts, these agencies will never be able to carry out such threats. That is to say that your spouse has nothing to fear.

The best thing to do in such circumstances is to request that a proof of the debts be mailed to your spouse. If the agency cannot demonstrate his or her responsibility for your debts, it will have to stop its recovery measures. Furthermore, your spouse can request that any subsequent communication be made exclusively by mail, which will put an end to harassing phone calls.

The expertise of trustees in bankruptcy

As mentioned in the opening paragraph, it is generally possible to go bankrupt without any consequence on the spouse. We have however also established that there are some exceptions that may be at times difficult to grasp. When in doubt, check with a trustee in bankruptcy. He is your best ally for everything related to debt and insolvency.

If needed, do not hesitate to call on the Ginsberg Gingras professionals. They will be able to provide you with specific information and to answer your questions concerning bankruptcy and its impact on your spouse. They may even, if applicable, suggest alternatives, including the consumer proposal. Click on the link to learn more about the consumer proposal and how it could help you get out of debts without filing for bankruptcy.

*The term “trustee in bankruptcy” will gradually be replaced by the new designation “licensed trustee in insolvency and restructuring (LTIR)”.

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