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Bankruptcy after divorce

by | Bankruptcy, Consumer Proposal, Debt Management, Uncategorized

The break-up of a marriage or common-law relationship has certain financial ramifications for both parties, including the splitting of assets and the creation of equalization payments (support).

However, both can be financially draining on one partner (and sometimes both) and could lead to bankruptcy.

So, what happens if one of the “exes” does file for bankruptcy as a result of financial hardship following the breakdown of the relationship?

Bankruptcy basically results in the liquidation of property (houses, cars, RRSPs, etc.) in order to pay off a portion of the outstanding debt (mortgages, loans, credit cards, taxes owing, etc.).

In the event of a bankruptcy following a divorce, the equalization payment also becomes an outstanding debt and the spouse being “supported” will have to settle for a reduced payment according to the bankruptcy payment agreement. However, spousal support does get preferred status in the bankruptcy’s payment distribution schedule, meaning it takes priority over other creditors such as credit cards and the amount outstanding is still payable after the claimant is discharged from bankruptcy.

So, in a nutshell, say John is supposed to pay Jane $1,000 a month for support and owes her $15,000 in back support. The trustee rules that over the course of his bankruptcy, John will pay back the $12,000 owed in the year prior to bankruptcy in addition to a percentage on the outstanding $3,000, and when he is discharged from bankruptcy, John still has to pay Jane the outstanding balance on the $15,000. Say John pays Jane $13,500 over the course of his bankruptcy; he still owes her $1,500 after he is discharged from bankruptcy. These are just examples for easy calculations and not indicative of actual payment schedules.

Now, the family home throws a wrench into the bankruptcy works. Under Canada’s Bankruptcy and Insolvency Act (“BIA”), the trustee liquidates the claimant’s assets to settle debts, but he can’t very well do that if the spouse with custody over the children is still living in the family home.

There are two solutions: force the sale of the family home in order for the bankruptcy claimant to realize his/her share of the asset’s value, or facilitate the sale of the claimant’s share in the home to the spouse receiving equalization payments. There are difficulties with either solution.

In the case of the former, provincial law may prevent the sale of the home due to the resultant financial hardship created for the child(ren)’s guardian, disruption of the child’s life, the availability of suitable alternative housing in the area of residence, the employability of the supported spouse (especially if he/she is required to stay at home to care for dependents), and even because of the history of the spouse and children in the family home.

Although preferable and perhaps an easier avenue toward asset liquidation, attempting to facilitate a sale between ex-spouses is dependent on the spouse taking possession of the house being able to secure suitable financing to purchase it. Again, that depends on the employability and financial stability of the spouse.

Either way, bankruptcy does make a difficult time more difficult for both parties in the separation but in the end, the bankrupt individual has a fresh start financially, and the supported spouse receives regular support payments (as opposed to the deadbeat’s “not at all”).

What becomes of the tools of your trade in Bankruptcy

by | Bankruptcy, Uncategorized

Many people are aware that in a declaration of bankruptcy, the individual’s assets are seized by a bankruptcy trustee and sold off to satisfy as much of the person’s debts as possible, and then the individual is required to make payments, based on his income, in accordance with a repayment schedule.

There are some assets (referred to as “property” in bankruptcy lingo) that aren’t relinquished, though. Although filing for bankruptcy is done at the federal level, the rules of exemptions are set by the individual provinces and territories in order to take into account the needs of the individual, which (naturally) may vary from region to region.

RRSPs older than those acquired in the final year before bankruptcy, for example, as well as insurance policies, property held in trust for another person (such as a house bequeathed to a child of the bankrupt individual), and furniture, food, fuel and clothing for the bankrupt individual and his/her family (up to a set amount). A vehicle is also exempt (usually to a set amount, though not in all provinces), presumably to accommodate the individual who has to get to work in order to continue to fulfil his financial obligations.

And then there are “tools of the trade.” Those are items (vehicles, equipment and other things) the individual requires in order to perform his/her job and, again, allows that person to continue earning an income in order to help meet the remaining financial expectations.

There is a dollar limit set on that property, with the excess valued against the amount of debt being written off. The value varies according to province or territory, usually in the $10,000 range, with the amount in Ontario set at $11,300.

Farmers, however, get preferential treatment. In the prairie provinces, for example, the farmer is allowed to keep up to 160 acres around the principal residence, and the equipment and supplies required to maintain operations for one year. In Ontario, a farmer gets to keep livestock, fowl, bees, books, tools, implements and other items (including seed for up to 100 acres, and feed and bedding for the coming winter) up to a value of $28,300.

The theory behind allowing you to keep some assets under bankruptcy is to allow the individual to be allowed a fresh start, while still fulfilling as much of his/her financial obligations as the law and creditors deem acceptable. Bankruptcy is not meant to be a punishment for not being able to pay off debt.

And, because payments are tied to the amount of income the bankrupt individual can generate over the course of the repayment schedule, it’s in everybody’s best interest to allow that person to keep what he needs in order to continue to work.