Bankruptcy Effect on Spouses: Will It Impact Their Credit?

Are you considering a consumer proposal or personal bankruptcy to settle your debts, but hesitate because of the potential impact on your spouse? The question arises: does your declaration of insolvency affect your spouse’s credit report? The general answer is no. Declaring bankruptcy or filing a consumer proposal has no direct impact on your partner’s credit report, whether you are married or common-law spouses.

In Canada, each person is responsible for their own debts, regardless of their marital status. However, in the case of joint debts, a few factors qualify the general answer. That’s why it’s essential to consult a Licensed Insolvency Trustee to determine the best way to plan for the financial future of all parties involved.

Choosing to declare bankruptcy can be a source of concern, but with the right support and expert advice, you can manage your debt problems with confidence. This article aims to inform you about the real impacts of insolvency on spouses, including the main exceptions and legal nuances.

Legal Separation of Debts

Canadian law stipulates that credit records are personal. Filing for bankruptcy or submitting a consumer proposal only affects the credit file of the individual who initiates the process. When you take these steps, your Licensed Insolvency Trustee (LIT) manages your debts only, not those of your spouse.

Only the party who is unable to meet their financial obligations can be declared insolvent. This means that if your spouse has no difficulty making their payments, they are not required to file for insolvency, and their credit report is therefore not affected.

Exceptions: When the Spouse’s File Can Be Affected

Joint Debts

In the case of joint or co-signed debts, such as loans or lines of credit, your spouse becomes solely responsible for the remaining balance if that debt is included in your insolvency proceedings.

While the bankruptcy or proposal doesn’t appear on their credit file, the lender has the right to  demand full payment from them. A failure to make payments at that point will damage their credit rating.

Additional Credit Cards

If you share credit card balances, it’s important to distinguish between a co-signer and an authorized user. The co-signer is legally responsible for repaying the balance, while the authorized user can use the credit but is not legally obligated to repay the amounts owed. If your spouse is a co-signer on a credit card that is included in your application, their finances will be affected.

Mortgage and Joint Property

A mortgage is considered a joint debt and must be maintained with regular payments. If your spouse has the financial capacity to continue making these payments, the house is generally protected and their credit is not affected. Your trustee can advise you and propose a plan for your mortgage if necessary.

Bankruptcy and Consumer Proposal: Indirect Impacts

Access to Credit

If you and your spouse need to obtain a large loan, such as a new mortgage, your poor credit rating could force your partner to apply for the loan individually. This may limit the total amount of the loan or increase the interest rate, which represents an indirect financial impact.

In some cases, even if the loan is solely in the name of the non-debtor spouse, the household’s overall financial situation may cause the lender to consider the risk to be higher. This can lead to less favorable borrowing terms, such as a slightly higher interest rate.

Your spouse’s credit history remains intact, but they will have to bear the responsibility for accessing credit for the couple’s projects. This is why quickly rebuilding your own credit history is key to minimizing this indirect impact.

Family Assets

If personal bankruptcy occurs, the trustee is responsible for liquidating the debtor’s assets that are not protected by law in order to partially repay creditors. When you share jointly owned assets, such as a cottage, a rental property, or money in a joint bank account, only your share of that asset can be claimed by the trustee to repay creditors. This situation can pose certain challenges for the non-debtor spouse, who is then obliged to either buy out the debtor’s share or sell an asset that they wanted to keep.

In short, your spouse’s credit is not affected, but your joint property and family assets may be affected by bankruptcy. That’s why it’s essential to disclose all your joint assets to your trustee in order to plan for their maximum protection.