What happens to family property and debt if one spouse declares bankruptcy after separation.
Pursuant to the Family Law Act s. 81, on separation each spouse is entitled to a one half interest in all property and they are each responsible for one half of all debt owed by either spouse:
Equal entitlement and responsibility
81 Subject to an agreement or order that provides otherwise and except as set out in this Part and Part 6 [Pension Division],
(a) spouses are both entitled to family property and responsible for family debt, regardless of their respective use or contribution, and
(b) on separation, each spouse has a right to an undivided half interest in all family property as a tenant in common, and is equally responsible for family debt.1
If one spouse declares bankruptcy after the date of separation, only their one half interest in any property which they owned at the date of separation is included in the bankruptcy and can be used to pay the debts of the bankrupt spouse. The other one half interest remains the property of the other spouse.
If a spouse declared bankruptcy before the date of separation, any assets which are registered in the name of that spouse alone (a car, for example) will be caught by the bankruptcy because the other spouse’s one half interest only crystallizes on the date of separation.
If a spouse owes debt in their name alone the debt will be eliminated by the bankruptcy. If the bankruptcy has occurred after the date of separation the trustee may pursue the other spouse to pay one half of the debt as their obligation to pay one half of all debt owed by either spouse crystallized on the date of separation. If the bankruptcy occurs before the date of separation the debt will be eliminated if it is in the bankrupt’s name alone.
If a spouse owes debt which is in the joint names of the spouses, the non-bankrupt spouse will have to pay the entire debt. They will still have a claim against the bankrupt spouse for one half of the debt but usually after the bankruptcy that spouse will have no remaining assets or ability to pay the debt.
1Family Law Act, [SBC 2011] CHAPTER 25