If you’re currently considering filing for bankruptcy or a consumer proposal, that means you’re struggling with high debts that you can no longer repay. These two debt relief options are essential for ensuring your life isn’t ruined by going into debt.
However, there’s one important consideration many clients have before officially filing for a bankruptcy or consumer proposal — how will it affect their spouse? Will it have an impact on their credit? Let’s break down the effects of bankruptcy and consumer proposals on your spouse’s credit, when it can affect it, and explore options for managing shared debts.
Will a Bankruptcy or Consumer Proposal Affect My Spouse’s Credit?
No, a bankruptcy or consumer proposal filed by one spouse does not automatically affect the credit of the other spouse.
In Canada, each person is responsible for their own debts unless they are jointly liable. If only one spouse files for bankruptcy or a consumer proposal, it should not directly impact the other spouse’s credit score.
Additionally, you and your spouse have separate credit scores. A hit to your credit score won’t do anything to your spouse’s credit score, and vice versa.
However, there may be specific circumstances where your spouse will be impacted. Let’s explore those circumstances below…
When It Can Affect Your Spouse’s Credit
A bankruptcy and/or consumer proposal can affect your spouse’s credit if you have joint debts, meaning you and your spouse are both legally responsible for repaying them.
Your spouse is responsible for the debts if:
- They signed the loan contract with you, making them one of the primary borrowers, or;
- They co-signed the loan or are a guarantor of the loan. Co-signing a loan makes them equally responsible for repayment. It’s no different from if they had taken out the loan themselves.
Can I file for bankruptcy or a consumer proposal if I have joint debts with my spouse?
Yes, you can still include joint debts in your bankruptcy or consumer proposal. However, you need to be careful.
If you file for bankruptcy or a consumer proposal without your spouse, you will be discharged from the joint debts, but your spouse will not. This means your creditors can still demand payment in full from your spouse.
If your spouse fails to repay the debt, your creditors can pursue collections actions such as wage garnishment or asset seizure.
What if my spouse isn’t insolvent? Will they still be responsible for repaying the full debt?
To be insolvent means you can no longer afford to repay the debts as required. Insolvency is a requirement to file for bankruptcy or a consumer proposal.
If your spouse isn’t insolvent, they won’t qualify for bankruptcy or a consumer proposal — so yes, they will still be responsible for repaying the joint debt if you do file.
It doesn’t matter if the creditors have agreed to a consumer proposal which lets you repay a smaller portion of the debt at a lower/no interest rate. Your spouse will still be responsible for repaying the debt under the original terms of your contract.
They will need to pay the debts on their own or using other less severe debt relief options that don’t require insolvency. Talk to a debt expert about what options you have.
Another Option for Shared Debts: Joint Consumer Proposals
As debt relief specialists in Canada, we often recommend joint consumer proposals as an option for couples who share debt. This allows you and your spouse to be collectively discharged from the joint debt under the new terms outlined in the consumer proposal.
In order to do a joint consumer proposal, your spouse must also be insolvent.
Another thing to note — if your spouse has a higher income than you, your creditors may demand a higher portion of the debt be repaid than if you had just filed the consumer proposal yourself.
To learn more about how a joint consumer proposal will work for you, speak to a 4 Pillars debt advocate!
You can book a free, no-obligation consultation with one of our debt advocates to learn how the rules of a joint consumer proposal apply to your specific situation. We can clarify if the option is viable while also discussing other options for debt relief.
Ultimately, the choice you make is completely up to you. We won’t try to persuade you one way or the other — our role is to simply inform you of how these debt relief programs work and whether you’re eligible.
