Will My Spouse Be Affected If I File For Bankruptcy Protection?
In general, each spouse’s debts are their individual responsibility. When credit bureaus track what individuals owe, and their track record of repayment, this is done via each person’s unique social insurance number. So, if one spouse misses a payment on one of their own debts, that failure to make the payment of an amount owing in a timely fashion will not impact the credit rating of the other spouse.
Where things can get a bit complicated is when debts are jointly-held by the two spouses (i.e. both spouses signed an undertaking to repay them). In that scenario, each spouse will be responsible for 100% of the debt if the other spouse files for protection (either a bankruptcy or a consumer proposal).
Types of joint debts include bank overdrafts, lines of credit, and supplementary credit cards. A supplementary credit card is one which is linked to the account of the primary cardholder, even though the name on the card may be different. So if the supplementary cardholder is the wife and she declares bankruptcy, the husband as the primary cardholder will be responsible for the amount owing on the wife’s card.
Case Scenario #1: John & Sophie without joint debt
John is overwhelmed by his rising debt load and needs to file for protection from his creditors. Currently he is four months behind on all his payments and the creditors are getting hostile. They’ve threatened legal action, leaving John with few options. Because of this situation, John has decided he needs to file a bankruptcy but his wife, Sophie, is very concerned that his filing will affect her credit rating and her financial affairs. Does Sophie have a reason to be concerned?
In this particular case, Sophie does not share any debt with John (a good thing). They have their own credit cards, their own bank accounts and their own vehicles. The house is in Sophie’s name only, as is the mortgage. That’s good news for John and Sophie, because in this particular situation a bankruptcy will only affect John’s credit rating.
Both spouses need to manage their own debts and repayments in as efficient a manner as they can. When one spouse experiences financial pressures (as John is), further action may be necessary (a creditor could get a court order authorizing a garnishment of John’s wages, for example). In order to stop a garnishment, or other action by a creditor, John may need to file for protection from his creditors. But John’s wife Sophie is not required to file for protection as she is not insolvent and has no past-due bills owing.
Case Scenario #2: John & Sophie with jointly-held debt
Let’s take another look at John and Sophie. In this second scenario, their credit cards and lines of credit are shared between them, something called joint debt. In this second scenario, because Sophie has joint debt with John, she would be responsible for paying that joint debt in full if he filed for protection from his creditors. We see this type of scenario frequently in our practice.
John has a credit card with a supplemental card that Sophie uses. Therefore, Sophie is 100% responsible for the total credit used on that card. Because Sophie used that supplemental credit, both of them will be considered jointly responsible for all debts accumulated under that credit card account. And Sophie cannot remove herself from a supplemental card debt retroactively – the debt would become hers to deal with.
Keep It Simple By Keeping Debts Separate
By now the picture should be clear: If you share a debt, you share the responsibility for that debt. By keeping as much of your debt separate in your relationship you can avoid financial problems later on if one of you flounders and cannot pay down your bills.