Bankruptcy issues often arise in family law proceedings, and they can have a significant impact on both property division between separated spouses and any support payment responsibilities one ex-spouse has to the other. Let us take a quick look at how bankruptcy can affect equalization payments and how spousal support payments are handled when one ex-spouse files for protection from their creditors.
Effect of Insolvency on Equalization Payments
When a spouse owes an equalization payment (in accordance with a court order or separation agreement made prior to the bankruptcy date) and files for bankruptcy, the money owed for equalization is provable in a bankruptcy, just like ordinary unsecured creditors, and can thus be released by the bankruptcy’s discharge (completion of the bankruptcy). Any claims filed by the other spouse are stayed (no collection activity can occur while in a bankruptcy proceeding) and the funds can only be collected if the stay of proceeding imposed on them is lifted by the bankruptcy court.
If it is the spouse to whom an equalization payment is owed (pursuant to a court order or separation agreement) that files a bankruptcy, then the equalization payment must be turned over to the Licensed Insolvency Trustee during the bankruptcy process and will be distributed to all the verified creditors (the companies the bankrupt owes money to).
Effect of Insolvency on Spousal Support Payments
Warning! Legalize ahead!
In respect to any money owed for child and spousal support in a pre-bankruptcy event (pre-filing), it is reassuring to know that the legislation protects the spouse receiving spousal support and the children of the marriage receiving child support by ensuring these amounts are not dischargeable by the other spouse through the filing of a Consumer Proposal or a Bankruptcy.
Below is a quick summary of relevant sections of the BIA (Bankruptcy and Insolvency Act) related to these issues:
178(1) (b & c) state: All obligations for child and spousal support will survive any bankruptcy (they will not be dischargeable upon completion of the bankruptcy). And, as per §69.41(1): the “stay of proceedings” (protection from collection activity), does not apply to child and spousal support claims referred to in §121(4) of the BIA.
In addition, section § 121(4) states: a claim for child or spousal support payable under a court order or agreement made before the date of the filing of bankruptcy is a claim provable (valid) in the bankruptcy (i.e.,a proof of claim may be filed to receive funds to go towards the child and spousal “debt”).
And section §136(1) (d.1) states clearly: a claim for child and support payable under an order or agreement made before the date of the filing of bankruptcy in respect of the periodic amounts accumulated in the year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable, is apriority claim in the bankruptcy that takes priority over the other general unsecured creditors.
Therefore, the method of payment of spousal support is important when an individual who is a payor declares bankruptcy, as it affects priority. Both lump sum spousal support arrears and periodic spousal supports arrears are provable in bankruptcy. However, only lump sum spousal support and periodic spousal support for the 1 year prior to the bankruptcy date will receive priority after secured creditors, the Trustee’s administration fees and the Office of the Superintendent of Bankruptcy’s (government division) levy.
Periodic arrears that accumulated more than 1 year before the filing date of the bankruptcy are still provable, but do not have the “priority” over other unsecured claims to be paid first.
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