Separation and Insolvency

Mclennan and Company Default Feature Image

Separation and Insolvency

A marital separation usually creates a lot of anxiety and uncertainty for the parties involved. However, in many cases, agreement can be reached between the parties, often with the assistance of a ‘collaborative’ family law lawyer. What can complicate matters for the spouses who may be considering separation or divorce is when one of them becomes insolvent and has to either file Bankruptcy or a Consumer Proposal.

What About Debts?

Separation agreements spell out which joint debts are paid by Spouse A, and which joint debts are paid by Spouse B. Unfortunately, although this agreement is binding between spouses, it is not binding on the creditor. In other words, the entire amount of the joint debt can be collected from either spouse.

When Does this Matter?

  • When one of the spouses goes Bankrupt or files a Consumer Proposal; or simply, stops paying it.

We should also mention, many people come in to see us and assume that if they are married, then they are jointly responsible for the other spouse’s debts. This is not true, unless they co-signed the debt.

In summary, when spouses separate and have joint debt, and one of the spouses goes Bankrupt or files a Consumer Proposal with a Licensed Insolvency Trustee (“LIT”), then the other spouse is still legally responsible for the joint debt.

What About Assets?

It is important that both parties have legal advice they file for Bankruptcy or a Consumer Proposal. This is most important when one of the spouse’s goes Bankrupt, as the Bankrupt’s realizable assets are part of the Bankruptcy for the benefit of the creditors. An asset example would be the matrimonial home. Accordingly, a separation agreement that determines who owns the house and other assets should be dealt with before either spouse goes bankrupt.

What About the Case of a Consumer Proposal?

When one of the spouse’s files a Consumer Proposal, then the assets are not affected in the same way as they would be in a Bankruptcy.

This is because, the assets do not vest (or reside) with the Trustee, therefore the parties can allocate assets without this issue, however, it should be determined before one of the spouses files a Consumer Proposal.

What about Support Payments?

In a Bankruptcy, child support and spousal support do not get written off, they survive and have to be paid in full. In fact, the prior year’s arrears of support, becomes a Preferred (or priority) claim ahead of other unsecured creditors. These rules also apply in a Consumer Proposal.

These are just a few overview notes and things to consider when dealing with a separation or divorce, however, the most important ‘take away’ is that both parties should get their own legal advice prior to involving a Licensed Insolvency Trustee (“LIT). For more information, contact the debt consolidation professionals in London, ON at McLennan & Company Ltd.