How Does Bankruptcy Affect Your Spouse?

1. Jointly owned assets

When two individuals are married or cohabitating, they often acquire assets jointly. Even if they don’t, the non-owner spouse may have a claim to half of the assets in the event of a divorce or separation. When one of the spouses becomes bankrupt, that person's assets and liabilities become part of the bankruptcy estate. This means that their share of any jointly owned property, and the full amount of any assets they hold in their name only, belongs to the bankruptcy estate.

If jointly-owned property has realizable value available in bankruptcy, generally speaking the asset will either be sold, with the non-bankrupt spouse keeping their half of the proceeds, or the non-bankrupt spouse will have to buy out their partner’s share to keep the asset.

Where all of the assets are registered in the name of the bankrupt spouse, it may be that the full realizable value of those assets must be relinquished to the Trustee, which will impact a non-bankrupt spouse who relies on those assets.

2. Co-signed or guaranteed debt.

A spouse is generally not legally responsible for their partner's debts unless:

• they've co-signed the debt, resulting in joint and several liability. In other words, both spouses may be 100% responsible for the full amount of the debt according to the agreement that was signed. This is common with secured loans on joint assets like a house mortgage or car loan, and in the case of joint credit cards; or
• they've guaranteed the debt. Sometimes when one spouse applies for a loan, the lender will not lend to them unless someone with a stronger credit score or higher income, or who has a partial interest in assets owned by the borrower, guarantees they'll pay the debt if the borrowing party defaults.

Therefore, if one spouse declares bankruptcy, while it doesn’t automatically make the other spouse bankrupt, the non-bankrupt spouse may still have to pay some of the debt that is left unpaid as a result of the bankruptcy, and this can sometimes render the non-bankrupt spouse insolvent.

3. Disclosure of household information

When an individual is in bankruptcy, they’re required to provide certain information to their Trustee, including reporting on their household income and expenses (including their spouse's share) on a monthly basis. While the non-bankrupt spouse has the right to refuse to disclose their share of the household income and expenses, doing so could impact the amount the bankrupt spouse has to pay and/or cause them to have to stay in bankruptcy longer.

If the non-bankrupt’s income and expenses are disclosed to the Trustee during the bankruptcy, this information isn't generally made public. However, it may need to be reported to creditors, the government, and the court in some cases as part of full disclosure of the bankrupt's financial situation.

4. Household credit availability

A bankruptcy filing will show up on the bankrupt person's credit report for up to seven years (in the case of a first-time bankruptcy), which will most likely affect their ability to obtain credit in the future. Therefore, when a couple applies for credit, the bankrupt spouse’s poor credit rating may affect the couple's ability to obtain credit jointly. If the non-bankrupt spouse isn't able to be approved for the credit on their own, it will impact the household’s ability to obtain affordable credit.

On the other hand, many people already have a poor credit rating prior to making a bankruptcy filing due to defaults or overuse of debt. Therefore, the bankruptcy may ultimately positively affect the couple’s creditworthiness down the road as a result of the bankrupt spouse’s financial situation being resolved.

5. Household cashflow

When a person declares bankruptcy, their income is subject to a surplus income calculation, which means they often have to pay a portion of their income over to the Trustee. And if they want to keep valuable assets, they’ll have to pay the realizable value of those assets to the Trustee. So a lot of their income may be tied up dealing with their bankruptcy obligations, leaving less available to pay household expenses. In this case, the non-bankrupt spouse may have to take on additional financial responsibilities.

On the other hand, the bankrupt will no longer have to fund ongoing debt payments; therefore, the overall impact to the household cashflow is sometimes improved by the bankruptcy. Likewise, the financial counselling that's required during the bankruptcy may help the family improve their budgeting and planning skills, and most Trustees will invite the non-bankrupt spouse to participate in this counselling. This can have a long-term positive impact on household financial success.

6. Emotional strain

Financial difficulties can put a strain on any relationship, and the decision to file a bankruptcy can be a particularly stressful event. The non-bankrupt spouse may feel shame or guilt even though they aren't responsible for their partner's debts. They may also feel angry or frustrated that they have to deal with some of the above potential consequences of their partner’s financial situation.

On the other hand, taking action to fix financial problems can greatly reduce the stress felt by both the bankrupt spouse and their partner. If a relationship can survive the turmoil caused by the financial difficulties that led to the bankruptcy filing, the couple may find that they both feel a sense of renewed hope for their financial future as a result of the bankruptcy.

As you can see, while bankruptcy doesn’t directly impact a spouse, they may still be affected in a number of ways. Therefore, it can be useful for spouses to seek professional advice and support during the bankruptcy process

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options to determine if bankruptcy is right for their situation, and this includes assessing the impact of that option on their household. If you would like a free, no-commitment consultation to review your options, contact us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.