Disclaimer: The information contained in this article is general in nature and does not constitute legal advice. You should contact Jeff Li or a family lawyer if you are concerned about your family law issues.
For many people, family law and bankruptcy are two completely different fields that never overlap. However, the Bankruptcy and Insolvency Act (“BIA”) and the Family Law Act do intersect, and sometimes the consequences are far reaching.
Equalization
Many provinces in Canada, including Ontario and Manitoba, have a matrimonial property regime based on equalization of net family properties. That is to say, a married couple who separated are supposed to calculate individual net family property, which includes all the debts and assets in their names. The difference in net family property between the two parties would create a creditor-debtor relationship, and the party with greater net family property owes an equalization payment to the other.
Article 121 (1) of the BIA prescribes that “All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.” Accordingly, if the equalization payment constitutes a provable claim, such payment will be stayed in bankruptcy.
Consequence of Bankruptcy
It is worth noting that once a bankruptcy assignment is filed, the bankrupt party no longer has the ability to dispose of their property. All property will be automatically vested with the trustee. According to a senior lawyer, the trustee has no right to commence proceedings to equalize net family property in Ontario unless the spouses have separated and an application has been filed. Therefore, in order to qualify the equalization payment as a provable claim, timing is very crucial. The party who is owed or may be owed such payment should take a pre-emptive action to file such a claim before the bankruptcy is filed.
The interaction between them has been signified through a recent case: Thibodeau v. Thibodeau. In this Ontario Court of Appeal decision, it was held that “a spouse entitled to an equalization payment is an unsecured creditor of the payor spouse, however, and when bankruptcy intervenes, there are broader considerations at play. Other unsecured creditors have rights as well.” Although the court recognized that the insurance of the payment from the debtor spouse as protection for the creditor spouse is needed, the spouse who is entitled to equalization payment was just an unsecured creditor as other unsecured creditors in a bankruptcy.
The impact of this on equalization may be huge. Before a spouse receives or when a spouse is receiving the equalization payment to which he or she is entitled, if the payor spouse files for bankruptcy, in most cases the recipient spouse will never see such payment (or the balance of the payment).
Remedies
Fortunately there are a few mechanisms to deal with this undesirable situation. Before the filing for bankruptcy, one can ask the court to impose a non debtor-creditor relationship pursuant to the equalization process under s. 9(1) of the Family Law Act. There are a number of ways to achieve this, including an order to transfer or vest property in one of the spouses; create trusts of property or a charge against property in favour of one Spouse, etc. During the bankruptcy process, one can challenge the bankruptcy, challenge the discharge, and seek leave to continue proceedings against any exempt assets, etc. After a bankruptcy that releases an equalization payment, one may bring an application for spousal support and increased support.
To do all this, it is important that a client retains a lawyer who has experience in these matters. A good lawyer should be aware of the possibility of a spouse filing for bankruptcy beforehand and take appropriate measures to avoid the surprise.