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Separation or Divorce

In addition to being emotionally painful, a separation can have a significant impact on your finances.

Initial Situation

Philippe is a truck driver in his mid-forties. He and his wife have separated last July. Father of two teens, he was having a hard time making ends meet even when they were living together. The past year has been pretty rough. Because he has shared custody of their children, Philippe needed to find an apartment big enough for him and his two kids and contribute to the mortgage payments on the family home until it was sold. Philippe must pay $600 a month in child support plus the other fees that come with a separation (furniture, moving costs, etc.). He also owed $18,000 on two credit cards before the separation.  

At the end of February, when faced with a choice between paying off his credit cards or making his child support payments, he knew that he needed to take action and ask for help.

Issues

Separations are responsible for 25% of insolvency cases (bankruptcies and consumer proposals) in our firm. One must face the costs of moving, renting an apartment and helping your spouse maintain the family home until all matters are settled.. You have twice the costs with the same salary. Legal fees can add up quickly if there is a conflict. 

Philippe’s case is no different. Moreover, because he has shared custody of the kids, he will need to buy extra clothes and other items such as bikes, to avoid having to transport too much stuff back and forth. Even in the absence of litigation, separations have major impacts on one’s budget.

Philippe’s minimum credit card payments alone were $540 a month. And the $600 monthly child support payments took a large portion of his discretionary income. Plus extra expenses when the kids are with him (activities, food, or treats, etc.).

Eventually, Philippe had to choose between his child support or his creditors. Obviously, child support is not only protected from a proposal or bankruptcy but they also represent, for most people, a moral obligation to honour at all costs.
 

Proposed solution

We started by working on a realistic budget with Philippe. After this first step, it was clear that, taking child support and his basic needs into account, there would be no surplus for minimum debt payments. By calculating his debt ratio, we could confirm that it was impossible for him to consolidate his debts. In any case, he would not be able to make the monthly payment of $410 that would be required for a debt consolidation. 

We recommended the two following options for Philippe: a consumer proposal of $7,500 ($125 a month for 60 months) or a bankruptcy with a payment of $160 per month for 9 months.

Philippe was worried about the consequences of a bankruptcy, and we had to reassure him. First of all, a bankruptcy or a consumer proposal does not affect employment. In fact, it’s unlikely that his employer would find out that Philippe filed for bankruptcy (or a consumer proposal), and even if they did, the Bankruptcy and Insolvency Act contains provisions to protect one’s employment. It is therefore safe to assume that Philippe’s job would not be at risk.

As for the divorce, it can follow its course and Philippe can continue to honour his child support payments. 

As in a lot of cases, a bankruptcy and a consumer proposal offer very similar protections with few disadvantages. It all depends on your personal preference. Bankruptcy can be resolved faster than a consumer proposal (sometimes 9 months instead of 60 months) and is less costly ($1,440 plus the repayment of federal tax, if applicable) compared to a settlement offer of $7,500. Despite this, some people would rather avoid bankruptcy at all costs while others will opt for a faster and often less expensive option. 

Conclusion

This was a tough decision for Philippe emotionally, but he finally chose bankruptcy because it was the solution that allowed him to quickly turn the page during this challenging time in his life. Moreover, he knew that he had many more expenses to come. He decided to invest his resources towards getting settled properly. 

Under different circumstances, a consumer proposal might have been a better choice.