What to Do if Your Ex Declares Bankruptcy

Published on 29 August 2022, 07:22:56 AM

Wouldn’t you know it. Your ex-spouse flew the coop and declared bankruptcy. Wait your turn. You’re just another creditor in the bankruptcy wheel of fortune.

Bankruptcy is Not Unusual in Divorce

It would be an exaggeration to say it happens all the time. But yours won’t be the first tale of property division woes family lawyers have heard. Most legally married Ontario couples who divorce either settle amicably or go to family court for a property division agreement.

Unequal Equalization, Unfair to You

What’s hers is only yours if she has assets. Declaring bankruptcy can seriously mess up your equalization payments, that 50% share of net family property you acquired while you were married. 

Welcome to Your New Status as Unsecured Creditor

By declaring bankruptcy, your ex made you an unsecured creditor. Your equalization payments are an outstanding debt. Think you have special status? Forget about it. As an ex-spouse, you have no more privileges than any other creditor. 

Why the Bank Comes First

You guessed it. The secured creditors are first in line and that means her mortgage lender and car dealer. Almost any debt can be secured — a loan, credit line, credit card or Canada Revenue Agency tax lien on the condo. Provided she defaults on her payments, secured creditors can seize their collateral — the condo in Cambridge or that handsome 2018 Nissan Sentra. Unless she keeps up the payments. Then she can keep her secured assets and enjoy her new, bankrupt lifestyle. 

When You Get Your Say

You might get an equalization payment if anything is left after her secured debts are discharged. Your ex’s unsecured debts may include credit card bills, payday loans, unsecured credit lines or any other unpaid bills. Watch out you don’t take the hit. You are 100% liable for any debts you co-signed for or guaranteed while married. Any debts your ex incurred on her own are hers to pay or wipe out through bankruptcy.

Tell It to the Judge

Since you’re divorcing and not separating, your next visit (after your divorce attorney) is to Ontario bankruptcy court. Your application for equalization payments will be stayed until you get leave or permission from a judge to be added as a creditor. 

Making a Creditor Claim Against Exempt Assets

Some assets are typically exempt from bankruptcy proceedings. Leave allows you to attempt to collect your equalization payment from her “protected assets”, like RRSP and pension contributions made at least a year before a bankruptcy application. 

Can You Get the Car or the Couch?

That shiny Sentra is hers because she kept up the monthly payments — her dealer can’t just seize it. She can also keep any used vehicle worth up to $6,600 that has no loans or liens on it. The fabulous brown leather couch you covet is exempt from being seized due to bankruptcy, as are all of her furniture, household goods and personal effects. You could make a pitch for 50% of her unsecured assets, but you’ll need a court judgment to get your share. 

What Happens to the Matrimonial Home in Bankruptcy

You paid for your matrimonial home together. Surely you have a stake in it? Your ex is safe if the home is mortgaged to the hilt. She (and you) can keep and live in the matrimonial home — together if you want, unless she gets a court order for exclusive possession. Of course, that only applies if the mortgage gets paid (otherwise, the lender can foreclose). Like any joint debt, you are liable for 100% of the mortgage if she stops contributing. 

Calculating Your Share of a Matrimonial Home Sale

You say the home has skyrocketed and the mortgage plummeted since you bought it. If there is any equity in the home, your mortgage lender could force its sale and give you a share of the proceeds after realtor’s commissions, selling costs and the mortgage are paid. Since it’s a matrimonial home you bought together, you get 50% of anything left after the home is sold. 

Paying Off a Mortgage Shortfall

Things aren’t looking so rosy if the real estate market dips. You jointly owe $375,000 on the mortgage. Your matrimonial home is worth $315,000. Guess who owes the $60,000 shortfall?  Short of paying it yourself, you could declare bankruptcy to have your name removed from the mortgage. That way you’re totally free of mortgage liability.

How a Consumer Proposal Affects Your Home

Your ex has consulted a licensed insolvency trustee. He recommended she make a consumer proposal and not file for bankruptcy. That gives her more time to settle with unsecured creditors. She can pay back an agreed-to percentage of her debts, with no interest. Your matrimonial home is safe because now she can afford her share of the mortgage until the market ticks up.  

Buy Your Matrimonial Home From Your Ex

All this uncertainty is wearing you down. You already own 50% of the home. Buy your spouse’s share. She can use the cash to pay off unsecured creditors. You can pat yourself on the back. No more fussing over equalization or mortgage payments.

Who Owes an Ex’s Credit Card Debts?

Read the fine print: you’re 100% liable for the balance owing on joint credit card agreements. That means if your ex doesn’t pay, you get to. Look out for that convenient supplemental card too. Even if you didn’t request or use it, you could be legally obligated for whatever debt your spouse racks up. Talk to an Axess Law family lawyer (we’re in your area) if you’re on the hook for a supplemental card or other joint debts. They could affect your credit score.

Getting Enhanced Spousal Support 

Bankruptcy makes everything a little more awkward. Gladly, you can still get spousal support or request a child support order. Family court may even increase your spousal support to compensate for not getting equalization payments. Our Ontario family lawyers can assist you in applying to vary a spousal support order or get child support.

File for Equalization Payments in Ontario

Exercise your right to equalization payments during divorce. Axess Law Ontario family lawyers can give you legal advice on how to calculate your payments and file an application. Video calls with experienced family lawyers are available 7 days a week, day or evening, at times convenient for you. Dial toll-free to 1-877-522-9377 or in Greater Toronto at 647-479-0118 or use our online booking form for an appointment. In person appointments are accepted at our Ottawa, Toronto, Scarborough, Vaughan, Etobicoke, Mississauga Winston Churchill or Mississauga Heartland law offices.
Click here to learn more about Axess Law’s family law services.