Will A Consumer Proposal Affect My Spouse?
When spouses find themselves going through financial hardship, they often ask questions about how their debts may be affecting each other or how the other spouse is not or is involved when they file for a Consumer Proposal.
What Are Joint Debts?
Before going over what will happen when one person in a partnership files for a consumer proposal, it is important to gain an understanding of joint debts.
A common-law relationship or a marriage does not mean you are legally responsible when it comes to your partner’s debts.
This means you are held responsible for any debt that falls under your name, while your spouse will be responsible for any debt under their name.
However, if you co-signed on debt or you guaranteed your partner’s debt, then you will be held liable to repay these debts in full if your partner has stopped making payments.
Some people are under the assumption that a joint debt will mean they are only responsible for paying back 50% of the debt. Unfortunately, this isn’t true. If you co-sign on a debt, you are both held equally responsible to repay the debt in full. In practice, the creditors of the defaulting spouse will expect the spouse that has co-signed to carry on making monthly payments on a loan.
In some cases, supplementary cards will include fine print that states that when you use the card, you become automatically liable to pay for it. This means if you are using a “secondary” credit card and your significant other is the main cardholder, you may be held liable when it comes to the entire balance owing on the card.
Joint Debt Types
While just about any type of debt or loan can be considered joint debt, here are some of the more common examples:
- Credit cards
- Bank accounts
- Lines of credit
- Car loans
- Bank overdrafts
What Happens To Any Joint Debts If I Am Divorced Or Separated?
If you are divorced or separated from your spouse, but you have joint debts, creditors can hold your ex liable for repayments on debts if you decide to file a Consumer Proposal. Joint debt won’t fall away when you get divorced or you are separated. Creditors are not concerned whether you are separated or still together, you are still held liable to repay your debts.
Can Creditors Go After Your Spouse?
Now that you have a better understanding of what joint debts are, you may be wondering what will happen when one person in the relationship decides to file a Consumer Proposal?
A Consumer Proposal is described as a debt-settlement agreement that is legally binding and filed with a Licensed Insolvency Trustee. The agreement involves repaying a percentage to your creditors of what is owed, and they exchange this for “full” debt forgiveness. Consumer proposals can only be used for unsecured debt that you are responsible for paying back. This will include debts that you are owing and debts that you jointly owe with your spouse or another person.
If you don’t have any joint debts (unsecured) with your partner, then they won’t be affected in any way when you file a Consumer Proposal. This means your creditors are not permitted to try and contact your spouse when it comes to your debts. However, your creditors will and can contact your partner if they guaranteed the debts or co-signed on the debts.
The most common examples of joint unsecured debt include credit cards and lines of credit, but can sometimes also include car loans, bank account overdrafts, or bank loans.
When you have unsecured joint debt, your partner can be held liable to settle the debts in full even though your debts are being compromised due to your consumer proposal. While the spouse that is filing a consumer proposal may be shielded from any future collection actions (by a stay of proceedings), the other spouse won’t be unless they also file for bankruptcy or a consumer proposal.
If your joint unsecured debt is significant, first consult with your Licensed Insolvency Trustee, since it may be more sensible for your spouse and you to file for a Consumer Proposal. You can also choose to file a joint consumer proposal. There is also a third option which will involve one of the spouses filing for Bankruptcy and the other filing for a Consumer Proposal. Your trustee can provide the best advice on how you should both proceed when you are struggling with debt.
How To Handle Joint Debt
When you file a Consumer Proposal, any joint creditors can go after your spouse for collection. Your best course of action to ensure your spouse won’t be held liable for any of your debts is to call each of the financial institutions before you file a Consumer Proposal. When you co-sign on a mortgage, loan, or credit card, you need to gain an understanding of how you will be held responsible for that debt.
Will Your Spouse Be Involved In The Consumer Proposal Process?
There will be a few ways that your partner will be involved when you decide to file your Consumer Proposal.
Before filing the proposal, your Licensed Insolvency Trustee will first review your financial situation. This will include your income, the income of your spouse, your family expenses, your assets, and any joint assets. This overview of your finances and household budget will be the determining factor in whether a Consumer Proposal is right for you. This snapshot is also used to determine what you will be able to afford when it comes to repaying your creditors and the amount your creditors can expect you to pay back.
Let us now explain further in detail the financial assessment of married couples to assess what it usually included.
What Will Happen To My Spouse And Our Marital Assets?
You will keep assets that you own in your Consumer Proposal. You will be asked to provide information on any asset (you have an interest in), their value (approximate), and any debt that is secured against the assets to your Licensed Insolvency Trustee. Your creditors will be expecting to receive “value” for equity in assets that you own to form a part of your settlement offer.
If you have jointly owned assets, this means only your shared interest in this asset or your half is going to be considered when working out a reasonable or fair offer to the creditors you owe money to. Keep in mind that in consumer proposals, you get to keep assets, but you will have to compensate the creditor for the net value.
If your spouse owns assets solely, these will not be included when you are filing for your Consumer Proposal unless you have only recently transferred this asset or assets to your partner. You will need to declare whether you have transferred any of your assets within the last 5 years. Any transfer that was made below “fair market review” can be reviewed and then can be adjusted or reversed when it comes to your consumer proposal settlement. Any adjustments might be used to account for differences that you might have received if you sold the asset at a fair market value. But when your spouse has investments, savings, or a car that they have sole ownership of, these are assests that will not be impacted by your Consumer Proposal.
One of the most significant assets that are jointly owned by most couples is usually their matrimonial home. To keep your property, you have to compensate your creditor when it comes to your share for any equity that is in the property and to carry on making your mortgage payments every month. The consumer proposals won’t deal with any secured debt such as a mortgage. It is also common for consumer proposals to state specifically that you are required to carry on paying all your secured creditors and it will be outlined in the agreement that you have with them.
If you can still afford your payments on your mortgage, and the property in worth is less than what is compared to what you are owing, then you won’t be held liable for equity compensation to the creditors within your Consumer Proposal.
But when your property has a value that is less than what you are owing and you can no longer afford to keep up with your monthly mortgage payments, you can choose to give up your home. If there are shortfalls, your mortgage lender will be able to file their own claim within your Consumer Proposal. In the current real estate market, these cases are rare, yet they can still happen when you have a HELOC (home equity line of credit) against your property or a big second mortgage.
Does The Income Of My Spouse Impact A Consumer Proposal?
As mentioned earlier, when meeting with a Licensed Insolvency Trustee, they will first review your current financial situation, which will include your household income. The trustee is going to ask for proof of your spouse’s income to help determine whether your income for your household exceeds the government-set threshold. This is an amount that is called the “surplus income limit” and is the income amount that the government believes families require to maintain reasonable standards of living in Canada. It will also be based on the size of the family and this amount will increase annually for the purposes of inflation.
If your household is earning more than this threshold, then you will be regarded to have “surplus income”. This is a formula that is used for people that file for bankruptcy. However, to make sure your Consumer Proposal provides more than just bankruptcy, your trustee will first perform a calculation for surplus income.
When your spouse decides that do not want to provide proof of their income to your Licensed Insolvency Trustee, that is fine, but, this might increase the overall amount you will be required to offer in the consumer proposal. When your spouse has refused to disclose what they are earning, the trustee will adjust the surplus-income calculation according to the government rules. This will typically increase the surplus income amount payable under the OSB (Office of the Superintendent Bankruptcy) guidelines and ultimately the overall costs of your Consumer Proposal.
Will A Consumer Proposal Impact My Spouse’s Credit Rating?
If you file a consumer proposal it won’t be recorded on the credit report of your spouse, even when you have joint debts. Your Consumer Proposal will only be reported to credit bureaus under your name, which means it cannot affect the credit rating of your spouse or their score.
However, keep in mind that when you have jointly responsible debts, your Consumer Proposal will be dealing with your liability. This means your spouse is required to carry on paying for the joint debts unless they decide to also file for either bankruptcy or a Consumer Proposal.
Will I Still Be Allowed To Use My Spouse’s Credit Cards?
Yes, you will still be permitted to use supplemental cards to your partner’s credit cards while you are in a Consumer Proposal. But you must first ensure what the nature is of these supplemental cards.
For example, if you used these supplemental cards before you filed a Consumer Proposal, you need to make sure you will not be held liable for the debts of the credit card which you can find in the agreement terms relating to the credit card. If you are held liable, this debt will be listed on the proposal, which means your spouse will have to carry on paying for it.
An Individual Consumer Proposal Vs. A Joint Consumer Proposal
If your spouse and you have significant joint and personal debts, it could be a sensible approach to file for a joint Consumer Proposal. When filing a joint Consumer Proposal, it may help you to save a bit of money and effort when you file together. Once the agreed-upon amount is paid to all your creditors, you can both be forgiven or discharged from a balance owing on your debts.
However, it is important to know that a joint Consumer Proposal will impact you both when it comes to your credit score and your credit reports. The credit bureaus report the proposals as an R7 rating that will remain on both your credit reports for 3 years after the completion of the proposal. This could make it harder for you or your spouse to take out a loan or a line of credit until this proposal is cleared off both your reports.
If your partner is not carrying a lot of debts other than joint obligations, you should rather file your Consumer Proposal on your own. This means your spouse will only be held liable to pay back a portion of the joint debt that is owing. In this situation, you can decrease the overall debts that you owe, and your significant other won’t be taking a knock when it comes to their credit rating.
Obtain Advice From An Experienced Licensed Insolvency Trustee
When you have concerns or any questions about how consumer proposals may impact the other spouse, consult with a Licensed Insolvency Trustee to review your situation. Every personal and family scenario will be different and will require a unique customized solution.