Answer: How a partner or spouse's bankruptcy will affect you depends on a few factors, such as do you have debts together, property together, etc.
It could be their bankruptcy does not ffect you at all, or that you share debts and if one person goes bankrupt, then the debt becomes the full responsibility of the other person.
This article from our web site will explain this in more detail:
How Does My Bankruptcy Affect My Spouse Or Partner?
This has to be one of the more popular questions I get asked when people are researching or thinking they may need to bankrupt.
And it is a very valid question as well, this in part due to the many myths that still surround being insolvent, going bankrupt and have a spouse or partner.
Some people believe that is their partner or spouse goes bankrupt they are bankrupt as well, or they will be responsible for their partner’s debts, or they will be required to pay into their spouse’s bankruptcy; all of which is not necessarily true and in some instances, not true at all.
A simple rule to know in this situation is that if you and your spouse/partner have no joint debts or assets together, then their bankruptcy does not directly affect you.
Of course you will note I wrote, not directly affect you.
I say/write this as while you are not a part of their bankruptcy, it is difficult for someone so close to you to go through something like bankruptcy, and it not to have some effect on the household or yourself.
If you do have joint debts together and one person goes bankrupt, then the other person becomes responsible for the entire amount of the debt.
That is why in many situations if one person goes bankrupt and they have joint debts with their partner, the partner may need to go bankrupt as well, that is if they cannot service the debts.
So many times we hear of partners and spouses splitting up and one taking on all the debt, even though the debts may be in both names.
Then later when the one who took on the debt can no longer afford it goes bankrupt, the other partner or ex, is saddled with the debts and cannot understand why.
Let’s look at a couple of scenarios that may occur in a relationship if one of the partners/spouses were to go bankrupt:
Joint Debts: This has pretty much been explained above; if you have joint debts and one person goes bankrupt, the other person on the debt(s) becomes responsible for the entire amount of the debt.
Property Together: If you own property together and the debts are not in both names, just the property is, this can be broken down into two (2) sub-categories, if there is equity in the property and if there is no equity in the property.
If there is no equity, then it is possible the Receiver or Trustee in the bankruptcy to allow the non-bankrupt owner of the property to buy-out the Trustee’s interest in the property under a low-cost buy-out scheme. Meaning for a small fee the non-bankrupt person buys the interest in the house.
This preserves the property and all is well.
One other option that could occur here is that there is no equity and the Receiver decides to place a charge on the property.
This charge then stands for three (3) years on the property to see if any equity rises in the property.
This is a difficult option to have to deal with as it leaves the property in a sort of limbo state and you really will not know the outcome until the end of the three years.
If there is equity in the property, then the person going bankrupt’s portion of any equity can be wanted for the bankruptcy.
For example, if there is 20K of equity, then 10K, or half, may be wanted to be paid into the bankruptcy. This can be done in a few ways, but the two ways that are usually used is to either sell the property to realise the equity, or the non-bankrupt partner, can pay this amount to the Trustee and preserve the property.
So yes, in a worst-case scenario, the Trustee could force the sale of the property, which would have an effect on the non-bankrupt spouse/partner.
Living Together And Renting: If you have recently decided to live together and one of you is going bankrupt, and you have no joint debts and rent, then the only way the bankruptcy would have an impact on the non-bankrupt person is that the Receiver may want to know their wages. They may want to see wage slips and know how much the non-bankrupt person earns and contributes to the household bills.
This is for the Receiver to get an accurate picture of who pays what day-to-day bills and to see if then the person going bankrupt may have a surplus of income that can be used to pay into the bankruptcy.
This does not affect the non-bankrupt’s credit in anyway, nor does it mean they will pay into the bankruptcy. It is just for the receiver to know who pays what bills.
Living Together In One Person’s House: OK, this is or can be the tricky one.
You both have been living together, either married or not, in one person’s property that they own, and it is in just their name and they pay the mortgage.
If this is the person going bankrupt, then it will be an issue as the property will be viewed as an asset and could be wanted for the bankruptcy.
If the property belongs to the person who is NOT going bankrupt, then in the bankruptcy, the Receiver/Trustee may try to establish that the person going bankrupt has a beneficial interest in the property, even though the property is not in their name.
The longer the couple have lived together, the more this can be an issue.
Proving there is a beneficial interest in a property can be difficult, but so can proving there is not an interest.
If one partner can prove/document that they have paid all mortgage payments, council taxes, upkeep, maintenance, etc on the property, then there would not be any beneficial interest.
As you can see, this is a tricky area and one that can and does cause a bit of a problem.
Looking To Live Together After One Person Goes Bankrupt: If one of the partners has gone bankrupt prior to them living together, and they have no joint debts, then the only area that may come into play is the updating of the change to the Receiver.
The person who has gone bankrupt is obligated to update the Receiver in the bankruptcy of this change.
At this time the Receiver may wish to re-visit the income and expenditure form to see who pays what bills, and also view the non-bankrupt person’s wages, this to see if the person who is bankrupt then has any surplus income to pay into the bankruptcy.
This is by no means to try and cover every situation or scenario that can occur in a relationship if one person is to go bankrupt, but hopefully will give you some insight into what may occur.