divorce and debt

Divorce is not an easy process but when there is a substantial amount of debt involved, it can be more complex. Along with the many legal consequences, filing for Bankruptcy comes with an emotional aspect that can sometimes be overwhelming. 

Your marital assets will be affected by the timing of your Bankruptcy. Talking to a professional before you make any decisions will allow you to determine what is best for you and your spouse. 

In today’s podcast, Licensed Insolvency Trustee, Leigh Taylor, talks about divorce and debt. Topics discussed include:

  • How does filing Bankruptcy or a Consumer Proposal affect the divorce?
  • What happens to joint and individual debt?
  • When to declare Bankruptcy – before or after filing for divorce?
  • Does filing Bankruptcy discharge spousal and child support?
  • The emotional component of divorce

If you need further advice about the timing of your Bankruptcy vs your divorce, contact a Licensed Insolvency Trustee. They are federally regulated and licensed by the Canadian government and will give you honest, unbiased advice.

Wayne Kay 00:04
Welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

 I’m Wayne Kay. Today we’re going to be talking about divorce and debt. So what does that look like? I’ve heard that Bankruptcies do happen after many divorces.

We’re going to find out exactly what that means. Can Bankruptcy or Consumer Proposals help you through the divorce process? And does Bankruptcy affect things like spousal support and child support? 

To help us out with this today, Leigh Taylor joining me from LCTaylor Licensed Insolvency Trustee with offices in Manitoba and Northwestern Ontario. Leigh, thanks for being here.

Leigh Taylor 00:50
Well, it’s always nice to be here, Wayne.

Wayne Kay 00:51
Great to chat with you again. And this is going to be a great topic that can help out a lot of people because unfortunately, there’s something called divorce that happens quite regularly in our country. And so today we’re going to talk about divorce and debt. How big are these two D’s?

Leigh Taylor 01:11
Well, it’s true that financial problems are the biggest cause of divorce, but it’s also true that divorce is the biggest cause of Bankruptcy. So you have sort of a chicken and egg situation sometimes. But it’s certainly true that divorce creates all sorts of problems for people.

Wayne Kay 01:27
Yes, and we’re going to dive into that. And I think you’ve sat there at the desk across from people who are going through this. I guess I’m going to start off by asking you this question. How big is that divorce factor when it comes to Bankruptcies?

Leigh Taylor 01:45
Well, it’s pretty big. You have to understand that when you go through a divorce situation and lots of people have found this out, there’s a tremendous amount of additional expenses and financial problems that go along with it, and particularly if it’s financial problems that cause the divorce to begin with.

But there’s additional legal fees on both sides. They’re hiring lawyers and they’re expensive. There’s additional households to maintain because you’re living apart. You were living together before with the kids. Now you’ve got two households.

Not only that, but if you have two or three kids that go back and forth, both households have to be sort of large enough to take care of the kids when they’re there. And of course, kids are expensive. Child support, daycare  – there’s all sorts of additional expenses as well as restricted employment opportunities prior to a divorce. 

Your spouse could look after the kids if you had to work overtime or whatever. Well, those kinds of opportunities probably are done away with if you have to pick up the kids every day from daycare or from the babysitter or whatever.

And that’s not even to mention the emotional wear and tear that goes along with these sorts of things because of course, divorces by their very nature are adversarial. So all these additional financial strains on a family oftentimes very often will result in them seeking professional help to try and get by.

Wayne Kay 03:18
Include the financial side of things as well? Is that what you mean?

Leigh Taylor 03:22
Well, certainly yes, because they find that invariably they were carrying a certain amount of debt, credit cards and bank loans, et cetera. And that was fine when they could afford them. But when they’re living apart and all the additional expenses come, they quickly find out that they can’t make the payments. The credit cards get out of control, they’re arguing about who gets the car, let alone who’s going to make the car payment. So all those sorts of things just add up to almost an insurmountable problem in a lot of cases.

Wayne Kay 03:52
As you’re talking here, I’m thinking this is going to be expensive. And a lot of times maybe they’re not even in a financial place ready to do this separation.

You got to get another place, another apartment, and then you’ve got to put down payments in an extra pay, another rent, and everything else you were just talking about. At what point is the best time for them to reach out for some help when it comes to this by reaching out to a Licensed Insolvency Trustee?

Leigh Taylor 04:24
Well, certainly the earlier in the process that you look at what the possible solutions are, the more solutions that would be available to you. If you wait too long then you’ll find out that your creditors are suing you, getting judgments against you, garnishing your wages, and that starts to take away a lot of the options you might otherwise have had. So the earlier in the process the better.

But the reality of it is, is that this is probably right up there with the top two or three emotional difficulties people run into in their lives. The last thing you’re thinking about is what your creditors will do when you’re trying to figure out how you’re going to support your kids and pay the alimony or child support and all the other problems that go along with it. 

What generally happens is that people start going through a divorce process. It’s usually a year or two before it’s sort of resolved to a point where you can get on with your life and during that period of time, everything sort of catches up with them. The creditors aren’t getting paid, the banks are talking about foreclosure on your house, you’re trying to struggle just to make ends meet and it’s just not working out plus all the additional expenses.

So usually people put these sorts of things off and don’t deal with them as quickly as they could or should. But that’s part of the process, that’s human nature and that’s why divorces can be so difficult.

Wayne Kay 05:56
Now when it comes to the debts are growing and they don’t know what to do financially. Is it best to wait till the divorce is already done or at what point will the Bankruptcy or Consumer Proposal actually help the divorce process?

Leigh Taylor 06:14
Well, it all depends on the individual circumstances because every situation is unique. Oftentimes if there’s things like few joint assets and mounting debts. Bankruptcy for one or both parties can relieve the stress of the debts and allow both sides to focus on rebuilding things –  that could be arguing about who’s going to look after the kids or get custody of the kids. These sorts of things. 

You can focus more on some sort of an amicable resolution of those if you don’t have to worry about the creditors knocking on your door and phoning you and giving you court orders. So that’s one thing. But most often we meet people once both of them have sort of solved some of the properties and custody settlements, et cetera, and the bills are still unpaid.

So the Bankruptcy intervenes at that point in time to take care of some of the problems and help them get put back on their feet. Because if you can get rid of all of your debt problems, put them on hold until you solve them, that just takes away an awful lot of stress out of a very stressful situation.

Wayne Kay 07:23
Now, when you’re talking about dividing properties and stuff, let’s say you’ve got the joint house, I think most couples would have it in both of their names. How does that get resolved in a Bankruptcy?

Leigh Taylor 07:37
Well, again, it depends on the situation. But there’s a lot of commonality in that. If it’s in both names, joint title and one of the parties goes bankrupt, then the Trustee takes over that position. That half ownership of the house and the Trustee is going to try to liquidate or sell the house, get the equity out of it for the creditors because that’s what the Trustee is supposed to do. 

There’s lots of ways of doing that. Most often the couples will be arguing about how the house gets split and these sorts of things are a little easier when the Trustees are involved because we’re a little bit more objective about how you can deal with it.

For example, oftentimes there’s friction about whether the house will be sold or whatever. Trustee can be rather practical about it and say well look, this is what we have to do. If the other spouse wants to buy us out, that’s fine. We rearrange the financing and buy our half interest. Or if you can’t do that, then perhaps we will agree to sell it, pay off the various costs of selling it, commissions and legal fees, et cetera and then split the difference so the they will get their money out of it and the other spouse can get whatever their fair share is as well. It doesn’t always work out that way. 

Sometimes you’re faced with legal options of going to court and getting a court order for the division sale of the property and that’s expensive for both sides. Seldom doesn’t really become that much of an issue because where spouses will argue about these sorts of things when you step in as sort of a non related party, a Trustee looking just at the assets and trying to sort out the thing. You find that both spouses tend to act a little more civil to an innocent third party.

Wayne Kay 09:30
Thank goodness. Thank goodness. And that’s a great point though. You’re as a Licensed Insolvency Trustee, you’re looking at numbers, you’re putting emotion aside and trying to find out the best way for them to move forward through this. Right?

Leigh Taylor 09:47
That’s right. And when you get into emotional things like divorce, et cetera, and splitting up of assets, there’s so much emotion attached to some of the assets. 

I remember a case where both parties were fighting over a picture that was created, drawn or painted by one of their mothers. They thought this was the most wonderful thing in the world and they couldn’t agree on how to divide that up. The truth of the matter is, it was one of the ugliest pictures I ever saw.

So obviously it was strictly emotional. So when it comes down, what is the intrinsic value of this? I think, well, let her have it if she really wants it.

Wayne Kay 10:29
Right? Okay, you got me on that one. I’m sure that’s how it is though. It’s an emotional connection. It’s not the nicest thing in the world, but okay. I would think that whoever’s the mother that did create it would actually get it. But who knows? Now, when you go through something like this, how does Bankruptcy affect things like spousal support or child support?

Leigh Taylor 10:53
Well, that’s really important to understand. The Bankruptcy act itself says that alimony, maintenance, and child support are not discharged in Bankruptcy. But there are several ways that this can be effective. And depending on your situation, if you have a bunch of alimony and child support, you may find that you go through Bankruptcy, it gets rid of an awful lot of your other debt, and then in the end you find out you still have your alimony, maintenance, or child support left.

But having gotten rid of all the other debts, it’s a little bit easier to manage the child support payments because you don’t have the other expenses. So that’s part of it too. And there’s other things too. Like there’s a section in the act that basically says that any alimony payments in the last year are given a priority. So some of those debts can be relieved by selling off the assets.

Assets go to pay those in priority and it reduces the amount that’s left over for the supporting spouse. While it doesn’t get rid of those kinds of problems, it does alleviate the difficulty in managing them after the Bankruptcy.

Wayne Kay 12:04
So when a couple comes in, or do they come in separately because they’re going through the divorce, are both in Bankruptcy, or is it typically just one of the couple?

Leigh Taylor 12:18
Once they separate, they’re two legally independent individuals. So what’s in the best interest of one may not be in the best interest of the other.

It might be that one of the spouses has accrued most of the debt in their name and the other spouse may not be liable for it. So for them to go bankrupt probably doesn’t make a lot of sense. 

Oftentimes you’ll find that one of them will come in and deal with the problem, the other just wants to ignore it, hoping it will go away somehow. It doesn’t always happen, but they may end up after things get settled, taking a look and saying, well, maybe I should do that as well. And they’ll come in later.

Wayne Kay 13:02
Okay, I’m glad you mentioned that because I’m lucky that I have never had to go through this situation, thank goodness. So I didn’t know how that works. So legally, as soon as they file for the separation, they become separate.

Leigh Taylor 13:16
Yes. Now, just because your spouse has a credit card doesn’t mean that you’re responsible for it.

But what often happens is when you apply for the credit card, they say, hey, would you like one for your wife, for your spouse? And you say, sure, why not? And then say, well, get her to sign this little document that says that she’s jointly and severally liable for all the debts under the card. 

And of course, 15 years later, when there’s a financial problem that exists and they forget about the fact that your spouse signed the card and is responsible for it, and you go bankrupt and they turn around and pull out this little guarantee that says that your spouse is now responsible for the debt, that happens a lot. People don’t remember what they sign.

And it’s this fine print. Sometimes it gets you.

Wayne Kay 14:07
And we don’t even read the fine print for the most part. We don’t even read the big print for the most part either.

Leigh Taylor 14:14
I was just going to say a lot of times when you’re told it’s all, it’s just boilerplate stuff, it doesn’t mean anything. You can just sign it, it’s okay. Yes. So everybody says, Well, I can hardly read it, I forgot my glasses anyway, so what the heck.

Wayne Kay 14:26
So true. But this does come back eventually if things go sideways in our relationship. What’s your advice to anybody going through this?

Leigh Taylor 14:36
Well, certainly you want to get professionals dealing with it. If you’re going to have a marital problem, get marriage counseling as well. That can leave you an awful lot of problems. Even if it doesn’t fix the marriage.

It does give you a sound footing when you’re talking to lawyers and you understand what the legalities are that you’re going through, almost invariably there are going to be financial issues involved in this. That’s just the nature of it. 

The earlier you start dealing with those financial issues, the less onerous they’ll become. If that’s right at the beginning, then there’s probably several options that are available when you’re dealing with assets. Maybe you agree to sell the house or the car or whatever without an adversarial relationship so that the funds can reduce the amount of debt that’s going to be owed. But the earlier you get at it, the more options are available to you.

Wayne Kay 15:34
That’s what we keep learning with this show. And Lee, I appreciate your time and thank you very much for all this great information.

Leigh Taylor 15:41
Always a pleasure, Wayne.

Wayne Kay 15:43
My guest today, Leigh Taylor, and you can learn more or schedule a free consultation with LCTaylor Licensed Insolvency Trustee by going to the website LCTaylor.com.

And that is it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.

About Leigh Taylor

Leigh began his career as an Official Receiver with the Office of the Superintendent of Bankruptcy. He is a Certified Professional Accountant and attained his license as a  Licensed Insolvency Trustee in 1980.  

LCTaylor’s mission is to help people get out of debt through compassionate care and professional service. With over 40 years experience in the insolvency field, Leigh and his staff have helped over 50,000 Manitobans solve their debt problems.  

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