Your ex-spouse is declaring bankruptcy? Here’s how it affects you.Ginsberg Gingras
A separation is an incredibly difficult period for everyone, not only emotionally, but also financially. Finding yourself alone to deal with day-to-day responsibilities and daily payments can be an enormous challenge to overcome. What happens when your ex-spouse declares bankruptcy after your separation? How does this impact your finances?
In recent years, separation of a couple has been one of the main causes of personal bankruptcy in Canada. Separation significantly increases individual financial responsibilities. Sharing the cost of living between two people seems to be a good strategy to reduce different expenses. Sharing responsibilities can also mean joint purchase of property, and therefore joint debts or debts as co‑signatories.
As common as this may sound, what happens when you and your ex-spouse have co-signed a car loan and he or she declares bankruptcy? How much responsibility do you have for debts acquired before your separation? What is the real impact of an ex-spouse’s bankruptcy on your finances? In reality, cost sharing and debt sharing should not be confused, because one does not necessarily lead to the other. If your ex-spouse has accrued debt, it is not automatically your responsibility to settle it.
Sharing of common property
In a relationship, the two partners can often rent a property together or take out a joint loan, on a house for instance. During the process of separation, it is important to determine which property will belong to which ex‑partner and make all the relevant legal changes to ensure that the other ex‑partner will no longer be an owner of that property. In other words, you must ensure that the property is registered in a single name, and not in the name of both ex‑partners.
It is essential to go through this process in order to protect yourself in the event of your ex‑spouse’s bankruptcy. This will protect your property from a seizure which could arise from the bankruptcy of your ex-spouse. If you have not made changes to the property title and your ex‑spouse declares bankruptcy, you may have to fulfill certain obligations. However, you will not necessarily be required to make a full repayment of debt that does not belong to you, and will not necessarily be held responsible in case of seizure. It’s also important to note that the Licensed Insolvency Trustee (LIT) cannot seize property that you own but which is in your ex‑spouse’s possession. Such property will be returned to you once you prove that it belongs to you.
Co-signing for a property and bankruptcy
Here are a few situations that can arise when your ex-spouse declares bankruptcy. First, if you are still both listed as owners on property such as a house, the bankruptcy will impact the half of the house belonging to the bankrupt owner. The bank or Licensed Insolvency Trustee may advise you to take full possession of the house, including the mortgage and fees. If you don’t, the LIT will return half of your house to the bank, which will proceed with the sale of the half that does not belong to you. But you may also acquire the half of the property belonging to your bankrupt ex-spouse at that point. The creditor on the house may ask you to give up the house, which will remove you from the title of the house, but also from the debt. This will protect you from your ex-spouse’s bankruptcy. This is also the case if you are co-signatories on a car or car loan: the creditor or LIT will begin by asking you whether you want to keep the vehicle entirely in your name.
If you decide to keep the vehicle, the title will be transferred and will be solely in your name. From that moment on, you will be solely responsible for payments on the car. This is also the case for a house. You can also refuse to take responsibility for the car or house, in which case you will be discharged from the debts as a result of your ex-spouse’s bankruptcy. Remember that the LIT and the financial institution holding the debt in question have the obligation to inform you before any seizure is made and to offer you the opportunity to recover the property before the seizure.
Unfortunately, when it comes to debts or loans you co-signed for your then spouse, you will be held responsible for repaying them in the event of your spouse’s bankruptcy. Separation does not cancel your responsibility when you co-sign on someone’s debt if that person is not making the required payments.
Your separation does not automatically mean the loss of your property when your ex-spouse declares bankruptcy. It is important to make all the changes necessary to protect your ownership of your property. Even without such changes, you still have means of recourse through a LIT and through financial institutions to recover what belongs to you.
Consult a Ginsberg Gingras advisor to learn more about how to proceed to protect the property belonging to you in the event that your ex-spouse declares bankruptcy.