85 – What Happens to My Debt if My Spouse Files Bankruptcy?

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

I’m Wayne Kay, and in today’s show, we’re going to talk about what happens to your debt if your spouse files Bankruptcy. How will it affect you and then how is your debt when people get married? Do you marry the debt that that significant other may have as well? And then we’re going to discuss and find out, is it better to keep finances separate or is it better to have joint accounts? And finally, is your credit affected if your spouse files for Bankruptcy?

My guest today is Amanda Sherwood from Allan Marshall & Associates Licensed Insolvency Trustee with offices in Alberta, New Brunswick, Nova Scotia, Prince Edward Island and in BC. 

Hi, Amanda.

Amanda Sherwood 00:58
Hi, thanks for having me.

Wayne Kay 00:59
I’m looking forward to our discussion today because I’m sure this does affect a lot of families where one spouse files Bankruptcy. And so there’s many questions. Is this a common thing that happens?

Amanda Sherwood 01:14
Yes, it does. So I’m glad to be able to speak on it because there’s a lot of information out there that needs to be addressed.

Wayne Kay 01:20
Okay, so why don’t we just dive into that? If your spouse files for Bankruptcy, how does it affect somebody and how their debt is treated?

Amanda Sherwood 01:31
It really depends on whose name the accounts are in. When your spouse is going to be filing Bankruptcy, if the debt is in their name alone, then it’s not going to affect you. If you have joint debt or if you’ve co signed a debt for them, that’s where it’s going to affect you. 

You’re going to become responsible for the debt yourself and your spouse’s responsibility to pay the joint or cosign debt would be lifted under a Bankruptcy. So it’s not just going to be if your spouse files you’re completely affected, it comes down to who’s signed on, who’s wanted to open those accounts and become responsible for them, whose name is on it. The Bankruptcy is going to affect the debt that’s in that person’s name that’s choosing to file.

Wayne Kay 02:23
Oftentimes when this happens – does it happen when the person has debt before the couple gets together?

Amanda Sherwood 02:30
Yes, or after. They could have debt before they meet and then they would down the road, possibly have one account or two accounts that are joint or they’ve decided to make a purchase together and take out something on credit. Or they keep their finances separate. So if everything’s separate, it’s not going to have any bearing on you.

Wayne Kay 02:53
Right. Except for if you need to buy something.

Amanda Sherwood 02:56
True. It will affect your credit rating and your credit report.

Wayne Kay 03:02
Right.

Amanda Sherwood 03:02
Bankruptcy does sit on your summary section on your credit report. So if you are looking to finance down the road, you’re going to need to look at rebuilding your score for you to be able to apply for that together or your spouse is going to need to apply for credit on their own down the road.

Wayne Kay 03:19
Okay, so let’s dive into some of the questions. I brought it up. Does this happen where one person has a lot of debt, the other person doesn’t have any debt and when you get married, do you take on that person’s debt? I’m gathering not, from what you’ve said already.

Amanda Sherwood 03:37
Exactly, that is a common misconception. I get that said to me often that I know we’re married, so I know I’m responsible too. That’s not the case. You’re only responsible for what you sign for, for what you’ve arranged with that lender that you’re going to be responsible for. You don’t automatically get assigned that debt just because you’ve gotten married.

Wayne Kay 04:01
But I guess it’s easier. I remember I had some debt before I got married a million years ago, and my wife said, you have to be debtless for us to get married. So there went that happiness that I called a motorcycle. That was gone and we came into it debt free and built from there together. 

And I guess with my kids, same thing. I want to make sure that they’re not carrying debt when they’re getting into relationships or anything significant. 

Let’s talk about that. All of a sudden – is that a thing or am I just old fashioned and weird?

Amanda Sherwood 04:43
No, it’s a thing. You really need to take responsibility for what you’re signing for. I do see a lot of people jumping in to say, I will co sign that for you because the bank insists on it. So the person applying doesn’t have a great rating. They need a co-signer and then they’re eligible.

Well, the co-signer thinks, well, it’s fine because they’re going to make the payments. But that’s a huge responsibility. You need to make sure that you can service that debt if anything happens because you’re signing 100% responsibility, each of you. It’s not splitting the debt down the middle and each of you responsible for half. Once you sign on to that, you’re both going to be able to be contacted by that lender for collection if the primary person doesn’t pay it.

Wayne Kay 05:27
Okay. So if my wife and I both go, she wants to buy something and she needs me to cosign, I co-sign it.

But I’m assuming that she’s going to be making all the payments. So then when she defaults on a payment, it now becomes my 100% responsibility.

Amanda Sherwood 05:46
Exactly. They can collect from both of you at any point in time. The way it’s situated is that the primary person on the account is usually the one making the payments.

They don’t need to reach out to you because that person is making the agreed upon payments. But once they default, then they’re going to come looking your way.

Wayne Kay 06:03
Okay. So when you go into this, what are some of the things that the Licensed Insolvency Trustee is going to need from both parties?

Amanda Sherwood 06:14
That’s a really good question. A lot of people also, when I speak to them when they need to file, they’re very concerned that it’s going to affect their spouse. They don’t want to provide any information. But at the end of the day we do need some of it and it will possibly change the dynamic of what their options are. 

When you file Bankruptcy, a Licensed Insolvency Trustee is required to file certain tax returns. When you’re married you file your taxes individually but you need to include their net income on your return to see what you’re eligible for, benefits or child tax, GST, things of that nature. So we do need to collect their name, date of birth, social insurance number. Even though they haven’t filed Bankruptcy, it’s not going to affect them or their credit, we need that to file their taxes.

There’s also a responsibility to provide monthly budget sheets and in Bankruptcy your set income level is determined by your family size. So as a married couple you both need to disclose your income on your budget to be entitled to have the full family guideline. If you don’t include your spouse’s income then we can only use half the guideline and that determines how much you have to pay in a Bankruptcy. 

So when you meet with a Trustee, even though you don’t want your spouse affected, that first initial consultation that you would have to discuss your options. It is a good idea to provide all the information so that you can make an informed decision about what Bankruptcy looks like or what other options are available once the Trustee can look at the full picture.

Wayne Kay 07:54
But if you’re a couple, do you find that most couples come in together to discuss what the options are?

Amanda Sherwood 08:02
Not always. A lot of people do keep their finances separate. A lot of people don’t know what the other person has for debt. So it ranges, some people will.

You usually have one primary person that handles the finances and possibly the debts in the other person’s name. So you do have both of them coming in at that point to kind of go over the full budget. It’s very unique though, it just depends on what the family dynamic is. Some people just come in by themselves and say I need to clear things up, but my spouse has no idea I’m in this state. We keep everything separate and I don’t want them affected.

Wayne Kay 08:40
Right, and then what do you do at that point? Is it a responsibility to let that significant other know it’s not?

Amanda Sherwood 08:50
They will again need to provide that tax information but not necessarily the social insurance number. But we’re still going to need to file the taxes and it may affect them being eligible to receive benefits. So we do make sure we bring that up at the initial stage and advise you we don’t need that information. However, this is how it’s going to affect you down the road.

Wayne Kay 09:15
Wow. I’ve done a lot of these shows and this is the first time I’m really hearing about this topic. So I’m excited that we’re diving into this because I just kind of assume that it’s always better if you have joint and each knows about the other’s financial situation. I think that would be easier myself because you don’t have somebody else to bounce ideas off. Because not every idea, Amanda, that I’ve had has been a great one.

Amanda Sherwood 09:45
Exactly. Once you’re married, you are, in my opinion, you’re a team. So a team works better together when they’re operating out of the same playbook, if you will.

Wayne Kay 09:55
Right.

Amanda Sherwood 09:56
So you want to be on the same page for your future.

Wayne Kay 09:58
I would think so. Okay, good. So at least I’m not feeling too weird thinking that way because that’s kind of the way I think as well. But obviously some people, when it comes to spending money, they have a tough time. 

I know somebody that every time he would go into one store, he would buy a shirt. He didn’t need any shirts. He had a million shirts. And still he just felt guilty just going in that he had to buy a shirt and it would drive his spouse crazy. 

So they found it easier to just have separate bank accounts and live financially separately and then share expenses when it came to the house. Is it better when we look at the overall picture to do separate finances or joint?

Amanda Sherwood 10:42
That’s a really good question and a good point to make too, because I have varying opinions on that and it does, again, go back to the family dynamic. I never want to have a joint account personally, but the bigger credit that you need, for example, a mortgage, sometimes that’s necessary. However, I like to keep bank accounts and credit use separate because I find financial stress is very detrimental to your relationship right. If you’re not on the same page – if you have somebody that is a saver and somebody that is more of a spender, that can get very frustrating.

But if you are on the same page and you are working together, and you are both fully aware of income levels, expenses, what you’re able to spend for your fund money outside of all the responsibilities that need to be met, then that could be a potential situation where joint debt isn’t as risky as it might be. 

If you’re on completely opposite pages – if you’re going to go into a joint debt, you need to make sure that you understand what you’re signing and that you are 100% responsible to pay that. 

Like I said before, if that primary person on the account doesn’t, or if you do have a shared credit card that you’re both working on an account, you need to check in with each other and make sure you understand what the balance is on that card and that you do have the ability to pay it off when it’s due.

Wayne Kay 12:28
So I was very fortunate that my wife just took care of all of the billing information. She took care of it all. And then we finally got a card where I am taking care of it. And what’s weird is – it’s the whole new way of the world where you don’t actually get a statement anymore. And I think I was late by like two days and I was so stressed out over being two days late on this payment. I was, oh no, this is awful.

So now I’ve set it up in a calendar because it would be very easy to miss. I mean, I’m busy. I have things going on in my life. I can’t automatically remember exactly that on this date. I need to make sure that I check to see if there’s the statement because somehow it doesn’t always come in or what have you. But I almost feel better though, having my wife also being my backup, saying, hey, did you have it in her calendar as well?

Amanda Sherwood 13:23
That’s great because it’s nice to have that safety net of someone checking over. For some people that is a frustration. They don’t get along that well in that case, because you do have somebody that’s always double checking and someone that’s always missing it and getting overwhelmed with it. 

It’s super important to have a household budget that you can stick to so that everyone knows what it is, everyone knows when it’s due, whether you have a calendar on the fridge or whether you have a shared app.

Just reminders there are great apps out there that you can set your budget and set due dates for your expenses or set auto payments up with your banking. You can follow up with your credit report now through most of your bank accounts. 

There’s lots of technology now to help get budget friendly. And it’s extremely important to have a budget stick to a budget for your future because it’s not fun to stress about. Not having funds to make a bill payment or missing a bill payment. It can be very overwhelming.

Wayne Kay 14:27
We’re actually going to do another show and we’re going to talk more about budgeting and finding out if there’s any debt problems. So that’s coming up. But let’s finish our show today. 

Is your credit, I guess I should ask, is your credit affected if your spouse files for Bankruptcy?

Amanda Sherwood 14:45
That will come back to you if the debt is joint. So creditors typically only have the ability to note the account one way within their system. So if one person files Bankruptcy, they’re noting that on the account, that person’s Bankruptcy. So that’s going to show up on both of your credit bureaus. And that’s come into play too.

Not even just with spouses, but with any type of joint debt. So a parent co-signing a line of credit for a student or something of that nature. If you have a joint account that has to be noted with that creditor, it’s going to be basically frozen because the credit is going to get shut down. They’re going to note it on both credit bureaus. 

If it’s just in your spouse’s name, then no, it’s not going to affect your credit rating at all. If it’s in their name alone, the bankrupt spouse is going to have the Bankruptcy information in their summary section on their credit report, but not the other spouse who didn’t file.

Wayne Kay 15:47
Okay.

Amanda Sherwood 15:48
And one important point that I do like to bring up with joint debt is that if it is credit that you have access to, like a credit card or a line of credit that you have revolving credit on and you needed a co-signer and that person files Bankruptcy, then you’re typically not eligible for that credit anymore. So you’d have to reapply for your own name.

Wayne Kay 16:09
Okay.

Amanda Sherwood 16:11
Right. That new account – open up in your own name.

Wayne Kay 16:13
Because you have a good credit rating that hasn’t been affected. I just imagine this would be extremely difficult in a marriage. One person to be going through it and one person not. I think it would be tough.

Amanda Sherwood 16:25
It certainly is.

Wayne Kay 16:26
Not good either way. But we want to help people that are in these situations. That’s why we do this show. What’s some advice you can give to us that can help out those couples that are having this exact thing we’re talking about.

Amanda Sherwood 16:38
If you feel that your finances are causing stress in your life or in your relationship, I highly suggest reaching out for a free consultation. I don’t know how many times I have heard, I didn’t know this is how Bankruptcy worked. I didn’t know I had this option, or I didn’t know how simple it was really, to alleviate that stress. Money problems are fixable.

You just need to reach the right person. A Licensed Insolvency Trustee is trained to assess your situation and give you all options, and then you get to decide how you want to proceed. Information is free, so if it’s out there, get it, and then you can decide how to make your future better.

Wayne Kay 17:20
And you don’t have to make a decision at the end of that free consultation. You’re not being held to, okay, which one do you want to do. You get a breather, and I think that’s great advice. 

Amanda, wonderful job. Great having you on the show, finally.

Amanda Sherwood 17:37
Thank you so much.

Wayne Kay 17:38
My pleasure. There’s my guest today, Amanda Sherwood. And if you want to learn more, you want to schedule that consultation with Allan Marshall & Associates Licensed Insolvency Trustee, you can go to the website wecanhelp.ca. 

That’s it for today’s Debt Matters podcast. 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.