What you need to know if your spouse goes bankrupt.
“My husband is an entrepreneur with a wildly unsteady income. Most of our big expenses, like the family car, we have financed jointly. (Meaning I paid for them.) Now he has had a run of “bad luck”. (Meaning bungled business schemes.) He’s considering declaring bankruptcy so he can get a “fresh start”. (Meaning my retirement plans just went to hell.) So not fair.”
– Jennifer, North Vancouver
Your spouse is in hot water with his creditors. He’s got a ton of credit card debt. He’s maxed out his personal line of credit. He’s late with his car loan payments. Now, he’s talking about filing for personal bankruptcy. You’re wondering: “Am I responsible for paying his debts?” Learn what you need to know if your spouse declares bankruptcy.
You aren’t automatically responsible for your spouse’s debts
Under Canada’s bankruptcy laws, if your spouse declares bankruptcy, you aren’t automatically on the hook for their debts.
Any debts your spouse acquired on their own are their responsibility. For example, if your spouse signed a loan agreement to buy a car before you met, the creditor can’t come after you for payments. If you never signed the agreement, you can’t be responsible for the debt.
However, there are certain situations where you can be responsible for a spouse’s debts. These are discussed below.
When a debt collector is trying to collect a debt, they might tell the debtor that if they don’t pay, the collector will demand payment from the debtor’s spouse. This is a scare tactic. There are strict rules preventing a debt collector from contacting a debtor’s family members. See our guidance on dealing with debt collectors.
If you have joint debts
If you have a joint debt with another person, both of you are responsible for what is owed, regardless of your personal relationship. If one person isn’t able to make the monthly payments, the other person is required to pay.
For example, if you and your spouse take out a car loan together, the loan is a joint debt. If your spouse declares bankruptcy, you’re legally responsible for making the payments on the loan. Your spouse’s bankruptcy would clear them of the obligation, but not you.
If you have a joint debt that has been secured with collateral, and you default on the debt (such as by missing a payment), the secured creditor is legally allowed to take the collateral and sell it. See our page on when a creditor wants to repossess your property.
If you have joint accounts
If you have a joint account with another person, both of you have ownership rights over the account, regardless of your personal relationship. For example, if you have a joint chequing account with your spouse, you both own the money in the account. And you’re both legally responsible for any amount owing on the account—that is, any overdraft on the account.
If your spouse declares bankruptcy and your joint account is in overdraft, you are legally responsible for the full overdraft.
If the joint account has money in it, the licensed insolvency trustee will look at the account and determine who gets it. While going through bankruptcy, your spouse is permitted to maintain a “reasonable standard of living”. Any amount of surplus income or savings in a joint account would go to the trustee to distribute to creditors. For more, see our page on declaring bankruptcy.
If you share a credit card
If you have a joint credit card with your spouse and they declare bankruptcy, you are legally responsible for the full amount owed on the card. Your spouse’s bankruptcy would clear them from the credit card debt, but not you.
A “supplementary credit card” is treated differently. This is a credit card issued to someone other than the primary cardholder on an account. It’s usually offered to the spouse, parents or children of the primary cardholder.
Often, all transactions with a supplementary credit card are billed to the primary cardholder. In that case, if your spouse was the primary cardholder, they would be responsible for any amount owing on the card. You would not be responsible. Ultimately, how supplementary credit card debt is treated depends on what your credit card agreement says.
If you co-signed or guaranteed a loan
When you co-sign for a loan, you and the borrower agree to be jointly responsible for the debt. Each of you is fully and independently on the hook for the loan. If one of you fails to make payments, the lender can ask either of you for the money.
When you sign a guarantee for a loan, you promise to pay the debt if the borrower defaults on an obligation, such as missing a payment. You are the lender’s second resort. The lender must ask the borrower for the money before asking you.
In both cases—co-signing for a loan or guaranteeing one—the lender can come after you if there’s a default. But if you co-sign for a loan, the lender can come directly to you for payment.
If you co-sign or guarantee a loan for your spouse, and your spouse files for bankruptcy, the creditor will almost surely come after you for payment. Whether you are the first or second resort, the reality is that the lender can eventually look to you for payment. For more detail, see our page on co-signing or guaranteeing a loan.
If you co-own furniture
Under bankruptcy laws in Canada, the property of a bankrupt may be taken (“seized”) and sold to pay their creditors. Under the law in BC, certain property is exempt from bankruptcy proceedings. If your spouse declares bankruptcy, they can protect household furnishings and appliances up to a value of $4,000. (For more on the exemption rules, see our page on declaring bankruptcy.)
If you own furniture or other household items jointly with your spouse, the licensed insolvency trustee will determine the value of the jointly owned furniture. They will divide the value in half. Your share can’t be used to pay your spouse’s debts.
Any piece of furniture that belongs completely to you (for example, you paid for it with your own money) cannot be seized.
If any furniture has been put up as collateral under a security agreement, the secured creditor is legally allowed to take it and sell it. See our page on when a creditor wants to repossess your property.
If you co-own a home
During bankruptcy, your spouse can keep their principal residence if:
- their equity in the residence is less than $9,000 ($12,000 if the residence is in the Metro Vancouver or Victoria areas), and
- your spouse is not a party to a proceeding involving a mortgage.
If your spouse’s equity is greater than the amount set by the exemption rules, the residence can be seized and sold during the bankruptcy. From the proceeds, secured creditors would be paid first. Your spouse would get what was left over, up to the prescribed amount of the exemption.
If you own your home jointly with your spouse, the same rules would apply. If your spouse’s equity in the home is under the exemption limit, the home would be exempt from bankruptcy proceedings. If their equity in the home is greater than the exemption limit, the home can be sold to pay your spouse’s creditors. However, only your spouse’s portion of the proceeds from the sale would be used. Your share of the proceeds would be protected.
Any property you own outright (not jointly with your spouse) is protected from seizure, unless your spouse paid for the property. If only your name is on title to your home or your car, those assets cannot be seized to pay your spouse’s creditors.
If you receive support payments
Under Canada’s bankruptcy laws, going bankrupt doesn’t release a debtor from an obligation to make spousal or child support payments. Your spouse must continue to pay any spousal or child support after being discharged from bankruptcy.
If your spouse still owes you for earlier support payments, you can make a claim for them as part of your spouse’s bankruptcy. The payments are a debt that is legally owed to you.
For more on what to expect from bankruptcy proceedings, see our page on declaring bankruptcy.