Debt and Divorce

Debt and Divorce

 

Do you know the top four external events that lead to a financial crisis?

They are:

  1. Job loss
  2. Critical illness (yourself or an immediate family member)
  3. Disability
  4. Divorce

Yes, divorce is a leading cause for financial strain and can leave many people nearly crippled financially.

There are emergency funds and there are major life events. Many life events are much greater than our emergency funds can support and often occur before one is able to build their emergency fund. “There is this general belief that people who are overwhelmed by finances just haven’t managed their money or didn’t have an emergency fund.”  Explained Taz Rajan, Community Engagement Partner at Bromwich+Smith Licensed Insolvency Trustees.  “We see real-life examples daily of people that are good at managing money, are doing their very best building an emergency fund but an external factor, like divorce completely changes the game.”

There are many reasons why divorce can bring on financial strain.  The most obvious is that you are going from a double income household to a single income household.  There are expenses associated with the actual divorce process including legal fees, moving expenses and possibly child support and/or alimony payments.   It is an emotionally and financially trying life event – so what can you do to manage financially?

First of all, take stock.  Get a real estimate of your new income and all your new expenses and build a budget.  It’s important to know what your new normal will be financially.

Once you know your numbers ask yourself some tough questions – Is my income more than my expenses?  Are my new expenses higher than my total income?  Am I able to pay off my debts now that I will be divorced?  Can I increase my income? Can I decrease my expenses?  Am I realistically able to pay my debts as they become due?

How to deal with debt and divorce?

When you review your situation and your ability to pay your debts as they come due, you may find that you really cannot afford it.  It may make sense for one or both of you to sign into a Consumer Proposal or declare bankruptcy to deal with your debt – for many couples, it is the best solution. Which of the two is ideal for your unique situation is best discussed in a personalized consultation with a Licensed Insolvency Trustee firm like Bromwich+Smith 

Joint Debt

Most people believe that with joint debt, each spouse owes 50% of the debt.  In fact, if one spouse defaults on a joint debt or declares bankruptcy, the other spouse becomes fully responsible for the entire debt, 100%.  Joint bankruptcy filing requires both spouses to be on board and willing to work together.  It is important to note that you cannot contract your lender out of the equation in a divorce settlement. 

That means, if one spouse agrees to take on a debt 100%, it must be communicated with the lender and the other spouse must be removed.  This often means refinancing the debt into 1 spouse’s name only.  Where this step is not taken and the spouse responsible for the debt defaults or declares bankruptcy, the lender can and will pursue spouse number 2 for full payment.   When drawing up your separation agreement, be sure to speak to your lenders and ensure that you are compliant with your lender terms.  If you find you cannot qualify to take the debt solely in your own name, you may want to speak with a Licensed Insolvency Trustee for options to alleviate the burden of debt.

 

Some debt won’t go away even with a bankruptcy

It’s important to know that certain debts cannot be included in a bankruptcy, namely child support and spousal payments.  In a divorce, these new payments can often cause financial strain and lead to declaring bankruptcy so it’s important to know that child support and alimony payments survive in a debt restructuring.

 

An alternative to Bankruptcy that could be advantageous to both partners – Consumer Proposal

Consumer proposals are an alternative to bankruptcy that may work to both spouses’ advantage in a divorce.

A consumer proposal is a legal procedure whereby a debtor (or debtors) offers to repay a portion of unsecured debts. If a couple has a significant amount of joint debt, it may make sense to agree to repay the debt together. This does require both partners to be somewhat amicable through the divorce process.

The funds for the proposal could come from the sale of assets, or from each spouse proportionally based on income. A joint or concurrent consumer proposal can relieve both spouses from overwhelming levels of debt and create the opportunity for a fresh financial start following the divorce.

Bankruptcy and creditor protection

 

Bankruptcies fall under the Bankruptcy and Insolvencies Act or BIA.  The BIA also governs the Office of the Superintendent of Bankruptcy or the OSB.  Bankruptcy is a legal process to relieve the honest but unfortunate debtor of their debts.  At the end of the process, the bankrupt is released from the obligation to pay the debts they had when the bankruptcy was filed (with some exceptions) -later we can link this to a bankruptcy blog Once a bankruptcy is signed, a Stay of Proceedings immediately prevents creditors from starting or continuing legal action such as garnishing wages or bank accounts, collections or judgements.  The stay of proceedings is legally binding and only available through a Licensed Insolvency Trustee in Canada.  Divorce is a very stressful process and the stay of proceedings can give you peace of mind.

What to do next

 

1.       Take stock- put pen to paper and really do a budget for your new situation post divorce -link budget blog here

2.       Discuss your debts with your soon to be ex-spouse and see if you can agree on a course of action. 

3.       If those debts are overwhelming given your new situation, discuss the idea of filing a bankruptcy or consumer proposal together. If things are amicable you could pursue this jointly.

4.       Get all the facts to make the most informed decision with a FREE, no obligation and personalized consultation

Licensed Insolvency Trustees, Bromwich+Smith have debt relief specialists available to offer debt advice and debt restructuring entirely from the comfort of your own home. Now offering video appointments with clients, Bromwich+Smith’s Debt Relief Specialists are available for initial free and confidential consultation by phone at 1-855-884-9243 or request a call back at contact us page.

 

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