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DIVORCE AND BANKRUPTCY

September 5, 2017

What happens when people go bankrupt in the middle of a marital separation or divorce? Bankruptcy and divorce do make for complicated bedfellows.

Equalization:

Family lawyers seek to equalize the value of family property during a divorce or separation proceeding.  The idea is that each party leaves the marriage with an equal value of family property, this will typically include an equalization of pensions and other investment assets.   For more detailed information about your situation we suggest that you speak with your legal counsel.

However, from an insolvency perspective there is case law that suggests a claim for equalization of matrimonial property may be reduced to a mere monetary claim since the claimant does not have a proprietary (ownership) interest in the property – they simply have a claim to monetary compensation commensurate with the value of the property.   Such claims may be discharged (dismissed) in a bankruptcy proceeding.

Having said that family courts have been known to outright ignore such cases, perhaps oblivious to them unless skillfully argued by legal counsel or perhaps because they prefer to mete out family justice in accordance with their own rules guidelines.  On the other hand, some family court judges have created work-arounds such as weaving equalization into support orders since support orders will survive bankruptcy.

Support payments:

Bankruptcy will not help you to find relief from the payment of support obligations whether it is support arrears or ongoing support, that obligation cannot be discharged in a bankruptcy proceeding.

However, garnishees of wages for support may be stayed (suspended) pursuant to Section 69.41 if they interfere with the bankrupt’s ability to pay surplus income.  However, after the surplus income payments have been made the support garnishee will be reinstated for the full value including any amounts resulting from the period of the suspension of the garnishee.  The payment of surplus income is a temporary measure for a short term.

Joint debts:

If you and your spouse are joint on certain debts the contract between each of you and the lender is not affected by any agreement that you make between you and your spouse.  So, although Bob may have agreed to pay the joint line of credit at TD Bank, his wife, Sarah, is still responsible for it even though a court order requires that Bob pay it and that Bob should compensate Sarah for any monies she pays on the line.  After Bob goes bankrupt, he is no longer responsible to TD Bank, or to Sarah, but Sarah still is on the hook to TD Bank.

Family car:

Wife’s car was always registered in Husband’s name but they were both on the loan.  When Husband went bankrupt he told the trustee that he didn’t want the car because he had a pick up truck that he was using.  The trustee determined that the car was worth $15,000 and only $5,000 remained on the loan.  The trustee decided it would sell the car and pay out the loan, bringing the remainder $10,000 into Husband’s estate for the benefit of his creditors.  Wife, however, similar to the previous situation was still responsible for the balance of the loan and had to find a new car.

Caveat:

Every situation is different and the information provided is merely a snapshot of some possible outcomes – speak with a Licensed Insolvency Trustee and your family lawyer about the specifics of your situation.