Almost one in five insolvencies in Canada (a bankruptcy or consumer proposal) involves someone who has experienced a marital or relationship breakdown. Often the financial problems occurred long before the divorce. Financial pressures often increase after divorce as two households are now trying to live on the same income as one household did before the separation. When these problems become severe enough to lead to the insolvency of one or both ex-partners, there are special legal complications when it comes to divorce and bankruptcy that need to be considered.
Alimony and child support
Some insolvent individuals have fallen behind in their alimony and child support payments. It is important to note that alimony and child support payments are not discharged in bankruptcy. However, if you are responsible for child support or alimony and you file for bankruptcy, you can deduct the payments from your income when your licensed insolvency trustee is calculating the cost of bankruptcy. For example, if you make net $3000 a month but owe $800 a month in alimony and child support, you can deduct the payments from your monthly income to lower your net income and reduce or avoid possible surplus income payments, as well as avoid extending the length of your bankruptcy.
If your ex files for bankruptcy, and is in arrears of support payments, the spouse who is owed money can file a claim in the bankruptcy like any other creditor and receive dividends from their share of the bankrupt's estate. Payments that are in arrears for 12 months prior to the date of the bankruptcy are considered a preferred claim, which means that they will be paid before all other creditors. Any alimony or child support that is not paid by the bankrupt estate is still owed by the paying spouse after they are discharged from bankruptcy.
Lastly, any unpaid equalization payments, as a result of a divorce or separation agreement, are treated like unsecured debts and are eliminated in bankruptcy (although this is a complicated area of law, so legal advice should be sought it the amounts are significant).
How your assets will be affected will depend on what came first: the divorce or the bankruptcy. If you divorced or separated first, and your assets were transferred to your spouse because of a legal separation agreement or court order, then those assets will not be affected by your bankruptcy. This assumes the transfer was not fraudulent in any way.
If you've filed for...