They say that nothing is certain except death and taxes. These days, you could probably add debt to that list. Rising interest rates and inflation have resulted in historically high household debt, with consumer insolvencies expected to increase by 30 per cent over the next three years.

Financial stress can take its toll on a marriage and is one of the biggest causes of divorce. And, ironically, marital breakups are the biggest contributors to bankruptcy. It’s no surprise considering that, if you are already having financial struggles, you are now trying to manage debt on only one income, facing mounting legal costs and potentially looking at support payments.

Even if there were no financial issues in the marriage, a litigious divorce and having to manage debt and expenses on only one income can also result in the need to file for bankruptcy.

So what does this mean for a divorcing couple?

The timing of a bankruptcy is significant in the face of a marital breakup, especially if one party wants to keep the marital home. Filing bankruptcy before a separation agreement is in place vs. after a divorce is finalized has an impact on the treatment of joint assets.

Before divorce

If one spouse declares bankruptcy prior to signing a separation agreement, their half of the equity in the marital home comes under the control of their bankruptcy trustee. If you, the other spouse, wish to stay in the home, you will need to work with the trustee to purchase your spouse’s share of the property. If an agreement can’t be reached, the trustee can force the sale of the home.

If, however, your spouse files for a consumer proposal as an alternative to bankruptcy, their assets are typically protected from creditors, giving you more control over what happens to the marital home.

After divorce

Once a Separation Agreement is signed and a divorce is finalized any assets transferred to you as part of the agreement cannot be touched by a trustee should your ex-spouse subsequently file for bankruptcy. However, any joint debt such as credit cards or car loans could still leave you vulnerable to creditors, regardless of what was agreed to in the Separation Agreement.

In addition, for the spouse declaring bankruptcy, any court-ordered spousal or child support payments you are required to make are not discharged as a result and you are still responsible for these payments.

Avoid surprises

It is important to have all your financials in order when separating and divorcing, especially when it comes to debt. Credit cards, in particular, can be a source of surprise when it comes to an ex-spouse’s bankruptcy. For example, if you have a supplementary card on your ex’s credit card, you are jointly responsible for that debt even if you have never used it.

Deal with creditors directly. If your separation agreement states that your ex is responsible for paying off a credit card or loan, contact the creditor to have that card or loan placed in your spouse’s name only. If this is not possible, you will still be responsible for that debt should your ex default on payments.

There are pros and cons to filing for bankruptcy (or consumer proposal) both before and after a divorce. As in all financial issues, be sure to talk to a licensed insolvency trustee to understand your situation and the options available to you.