Is Bankruptcy Ever The Best Solution Post-Divorce?

Bankruptcy is an unfortunate financial event which occurs when an individual or corporation cannot fulfill its creditors’ payment obligations.

Generally speaking, one’s bills become larger than one’s ability to pay those bills.

It can be voluntarily entered into, depending on your ability to get credit, but sometimes, declaring bankruptcy is the only option.

What is it?

Bankruptcy is the legal process that allows you to be released from most of your debts to creditors and begin fresh. In that sense, it can be a vital turning point to help an individual start over financially.

However, filing for it can have several complications. Your credit score and future ability to access credit can be severely hampered by going through proceedings. Therefore, buying a home, a car, or getting a credit card will be more difficult for a period of time.

Many of your assets, such as your home, car, and investments, can be seized by the trustee in bankruptcy so that the assets can be liquidated and distributed to creditors. But, items like pensions and segregated funds are creditor protected (for the most part) and cannot be seized by creditors.

Bankruptcy and Divorce

If you think that entering bankruptcy proceedings means that you get out of paying child or spousal support, I’m afraid you’re out of luck. Bankruptcy gets you out paying items like credit card debt, income tax obligations, loans and mortgages, but claims for alimony, spousal or child support payments fall outside of what bankruptcy will protect an individual from paying.  Therefore, filing for bankruptcy will not alleviate your financial obligations to your ex in this regard.

Bankruptcy versus Consumer Proposal

An alternative to filing for bankruptcy is called a Consumer Proposal. A Consumer Proposal is a legal procedure available to people living in Canada who are insolvent and experiencing financial difficulties, but can still afford to repay a portion of their unsecured debts.

A licensed trustee would meet with the debtor and work out a payment plan, and then present the payment plan to all of his or her debtors. In most cases, the debtor agrees to repay a portion of the unsecured debts (usually around 50%) instead of filing for bankruptcy. A proposal is better for the creditors because even though they may not get all of their money, they are getting more than they would get in a bankruptcy. If the proposal is accepted, it becomes a legally binding settlement of the unsecured debts.

A Consumer Proposal has no impact upon alimony, spousal or child support payments.

The effect of a Consumer Proposal on an individual’s credit rating is usually less severe than that of a bankruptcy. Also, a person may be able to keep their home and car through a Proposal instead.

The Takeaway

Bankruptcy or a Consumer Proposal can offer some relief to individuals who have over-burdened themselves with debt.

Whether you choose either of the above solutions will depend on your financial situation, your employment stability and your amount of debt owing. It would be highly advised to speak with a financial professional who can assist you in making the correct decision and discuss various strategies to help you through this process.