Bankruptcy is a formal solution that can help you deal with your unmanageable debt and get a fresh financial start, but it’s normal to worry about how it might affect other areas of your life, such as your spouse and their finances.
It’s a common misconception that any debt you accrue automatically gets linked to your spouse, and vice versa. However, bankruptcy is unlikely to affect your spouse or their finances unless any of the included debts are in both of your names. This is called having ‘joint debts’.
This guide will outline the effects of bankruptcy in more detail, including what bankruptcy is, how your spouse might be affected, and how your credit score will change.
What is bankruptcy?
Bankruptcy is a legal process designed to give you a fresh financial start by pausing all creditor contact and legal action for a set time before discharging you from your unmanageable debts. In other words, your debts will be written off (cancelled).It is governed by the Bankruptcy and Insolvency Act (BIA) and is officially defined as the ‘inability to meet your financial obligations’ which simply means you don’t have the funds to pay your bills as they’re due.
Because it’s a legal solution, you must work with a Licensed Insolvency Trustee (LIT) when you file for bankruptcy. They will complete your application on your behalf and ensure both you and your creditors’ rights are respected throughout the process.
During your bankruptcy term, you won’t be required to make any payments towards your debts unless you earn over a certain threshold and your creditors will be prohibited from asking you for payment or taking legal action against you.
How long does bankruptcy last?
The length of your bankruptcy term depends on several factors, such as your financial situation, your monthly income, and how many times you’ve filed.For example, if you’re filing bankruptcy for the first time, it will last nine months (21 months if you have surplus income) and if you’re filing bankruptcy for the second time, it will last 24 months (36 months if you have surplus income).
How much of your earnings you’re allowed to keep before it gets classed as surplus income is set out by the Office of the Superintendent of Bankruptcy (OSB) each year. It is currently $2,610 a month for a single person, $3,249 a month for a couple, $3,995 a month for a family of three, and $4,850 a month for a family of four.
The surplus income amount is charged at 50%. So if you are a single person and earn $2,800 a month, you’ll be required to pay 50% of the $190 overpayment into your bankruptcy ($95 a month).
How does bankruptcy affect your spouse or common-law partner?
It’s normal to worry about how any debt solution you enter into could affect your spouse or common-law partner and their financial standing. However, the impact of bankruptcy on your spouse depends on whether you have joint or personal debts.For example, if your debts are only in your name, only you will be affected by any bankruptcy restrictions. In other words, the debts included in your bankruptcy won’t have any impact on your spouse, their finances, or their assets, and their credit score will remain unaffected.
However, if you have joint debts with a spouse, they will still be responsible for paying the debt and might have to deal with creditors or debt collectors looking to recover the money owed.
Similarly, if your spouse co-signed on any of the debts included in your bankruptcy, they won’t be covered by the same bankruptcy protections and will remain responsible for paying back 100% of the amount owed.
How does bankruptcy affect a jointly-owned home?
If, like many people, you own your home jointly with your spouse, it’s normal to worry about what might happen to it if you or your spouse declares bankruptcy.The rules around jointly-owned property differ between provinces but in most cases, the LIT will only become the legal owner of the bankrupt’s share of the property. If the equity in the property is less than $10,000, it will likely be exempt from seizure.
For example, if you want to declare bankruptcy but you own a property with your spouse with equity of $50,000, each party will own $25,000 but only your share will be considered for seizure. In this case, you could pay your share of the equity to your LIT or your spouse could purchase your share of the equity from the LIT at market value.
How does bankruptcy affect your credit rating?
Bankruptcy is a significant financial decision that can have a serious and lasting impact on your finances and your credit rating.In Canada, credit ratings work on a sliding scale from R1 (best) to R9 (worst). For context, making payments in full and on time will give you a credit rating of R1 while bankruptcy will give you a credit rating of R9.
Most bankruptcies stay on your credit report for six years from your discharge date or 14 years for a second or third filing. During this time, your credit score will be lowered and you’ll struggle to get approved for most types of credit, including a personal loan, bank account, phone contract, or mortgage.
So while bankruptcy might seem appealing because it only lasts nine months, it’s important to remember that your credit score will remain damaged for several years after.
What is a supplementary credit card?
If you’re considering filing for bankruptcy, you might have come across something called a ‘supplementary credit card’. But what exactly are supplementary credit cards? And where do they fit into the bankruptcy process?Put simply, a supplementary credit card is a credit card that has the same account number as a primary credit card. The primary cardholder is liable for all charges on the account regardless of whether the primary or supplementary card was used.
The supplementary cardholder’s liability, however, depends on the terms of the individual agreement. They may have no liability, shared liability, or liability for the supplementary card only.
Conclusion
If you’re considering filing for bankruptcy, it’s normal to wonder “Will bankruptcy affect my spouse?” However, the only way a personal bankruptcy could affect your spouse is if you have a joint debt with them or they acted as a guarantor on any of the included debts. The same applies if your spouse files for bankruptcy.Bankruptcy can be an effective pathway out of debt, but there are other solutions available, such as a Consumer Proposal. The right option for you will depend on several factors, such as your debt level, monthly income, and your budget.
If you have questions about how bankruptcy affects your spouse, don’t hesitate to get in touch for free debt advice. It’s important to familiarize yourself with the potential benefits and drawbacks of bankruptcy before making an informed decision.