Family Law Blog

Bankruptcy and Separation in British Columbia

Bankruptcy and Separation in British Columbia

Undergoing a separation can be challenging. When two lives become joined, untangling the knot – both emotionally and financially – can prove a difficult task. Alongside the stress and administration work involved, it’s also a time when emotions can (and do) run high. 

Separations often provide a sudden financial jolt, which can leave many wondering where they stand financially. Going from having to support one household to two can be difficult and can sometimes result in debt racking up. Bankruptcy may also arise at this stage. That’s why it’s essential to understand how separation and bankruptcy work in British Columbia.

In this week’s blog, we’re going to break this topic down, explaining your rights and responsibilities as you navigate this difficult time.

Bankruptcy – Not Always a Clean Break

When an individual files for bankruptcy in British Columbia, they meet with a Licensed Insolvency Trustee (LIT) to evaluate their financial situation and discuss solutions to their financial problems. If bankruptcy is decided as the best route forward, the LIT deals with creditors on the individual’s behalf and sells their (i.e. the bankrupt individual’s) assets (excluding those listed later on in this blogpost). This also commences three important steps: 

  • Payments are stopped to unsecured creditors
  •  Any garnishments against salary stop; and
  • Any lawsuits filed by creditors will also stop.

As a result, bankruptcy is often viewed as a “clean break” for bankrupt debtors. Unfortunately, separation or divorce add complications to the bankruptcy process and prevent a clean break from occurring. Declaring bankruptcy does not absolve an individual of many of the debts incurred in a separation. These debts include:

  • Child support arrears;
  •  Spousal support arrears;
  • Damages owing for battery;
  • Court costs relating to spousal or child support;
  • Student loan debts; and
  • Interest on any of the above.

Joint Debt and Bankruptcy

Many of us are happy to co-sign or sponsor our partner’s loan applications while we’re happily together, but caution is advised before proceeding with an arrangement like this. Bankruptcy does not clear joint debts. Hence, if a couple subsequently splits and the holder of the loan declares bankruptcy, the co-signer is liable to repay the full amount.

If former spouses own a home (or other property) jointly, the bankrupt’s creditors will be entitled to their share of the equity involved. This may lead to the house (or property) having to be sold to service the debt. That said, if the non-bankrupt individual has the means to buy out their former partner’s share of equity, they can do that instead.

Bankruptcy and Assets

Some assets owned by a debtor are protected from bankruptcy, in that creditors cannot go after them and LIT will not sell them. These include the following:

  • RRSPs (except contributions made during the 12 months prior to bankruptcy);
  • Household items up to $4,000 value; 
  • Car equity up to $5,000 value ($2,000 value if the person is behind on child support payments);
  • Work tools up to $10,000 value; and
  • Home equity up to $12,000 value in Greater Vancouver and Victoria (up to $9,000 value in other parts of BC). 

Bankruptcy and Support 

Declaring bankruptcy does not mean that an individual with an ongoing support obligation is no longer obligated to pay support. Child support and spousal support are based on the payor’s income. Hence, if a payor spouse declares bankruptcy but continues to be employed - they cannot argue that their support obligation should be lowered - the payor spouse’s income remains the same and thus so will the support obligation. 

Here to Help

In matters of separation and finance, it’s highly recommended to speak to a family law expert like the team at Westside Family Law. If you have any questions about the process in BC, we are standing by to help. Contact us and we’ll be happy to assist.