Separation, Divorce and Bankruptcy

The decision to separate or divorce is never an easy one. Combined with the emotional stress of having less income, paying lawyers, having higher costs because of operating two households, and paying alimony and support, it’s easy to see why the financial strain of divorce is one of the top reasons people file for bankruptcy.

This is a complicated area especially if only one spouse files for bankruptcy, as both spouses may be impacted. Here are just a few of the consequences:

1. The house – If the matrimonial home is jointly owned, one spouse cannot transfer their share of the house to the other spouse unless it is pursuant to a Court order or fair market value is received. Any transfer for less than fair market value will be scrutinized by a Trustee in bankruptcy and could be overturned.
2. Spousal property claims – Filing for bankruptcy usually stops an ex-spouse’s claim for equalization of family assets. They may still be able to pursue assets that are exempt in a bankruptcy, like pension funds. This should be discussed with a lawyer so you know your rights.
3. Life Insurance policy – A life insurance policy with a cash surrender value with a designated beneficiary of an ex-spouse is an asset that the Trustee must realize on in a bankruptcy. If the beneficiary is a parent, sibling or child, then the policy is exempt.
4. Joint debts – Both spouses are jointly and severally liable for any joint debts. If there is a credit card or a loan in both spouses’ names, a decision can’t be made between the two spouses to split the debt. If one spouse files for bankruptcy protection, the other spouse is liable for the entire amount of the debt. A separation agreement that states that the bankrupt spouse was liable for the debt is not binding on the financial institution.
5. Co-signed Debts – Any debt that one spouse co-signed for the other spouse has to be notified in the bankruptcy. If the other spouse defaults on the loan, it may result in the institution calling in the loan and demanding repayment from the spouse who has already filed for bankruptcy or a proposal.
6. Not all debt gets eliminated – A bankruptcy will not eliminate the obligation to pay alimony or support, even if there are arrears.

Filing for bankruptcy is a complex matter where there is a separation and divorce, especially involving property. We understand that your priorities may be to protect your family. A Trustee in bankruptcy will review your financial situation in detail and fully explain how a bankruptcy will impact you and potentially your ex-spouse. You can then make an informed decision on how to move forward.


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