As we all know, bankruptcy issues often arise in family law files, and can have a significant impact on both property division between separated spouse and support issues.
Effect of bankruptcy on Equalization Payments
When a spouse owes an equalization payment (pursuant to a court order or separation agreement made prior to bankruptcy) makes an assignment into bankruptcy, these support arrears are provable in bankruptcy, just like ordinary unsecured creditors, and thus, released by the bankruptcy’s discharge. However, these claims are stayed and may only be pursued if the stay of proceeding 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 makes an assignment into bankruptcy, the right to the equalization payment then vest with the Licensed Insolvency Trustee.
Effect of Bankruptcy on Spousal Support Payments
In respect of any pre-filing arrears of Support, below is the summary of relevant sections of the Bankruptcy and Insolvency Act (the “BIA”):
- By 178(1)(b) and (c) of BIA, of all obligations for child and spousal support will survive bankruptcy;
- By §69.41(1) of the BIA, the stay of proceedings that generally stops the creditors does not apply to child or spousal support claims referred to in §121(4) of the BIA;
- By § 121(4) of the BIA, a claim for child or spousal support payable under an order or agreement made before the date of the filing of bankruptcy is a claim provable in the bankruptcy (i.e. a proof of claim may be filed to share in the funds);
- By §136(1)(d.1) of the BIA, a claim for support payable under an order or agreement made before the date of the filing of bankruptcy in respect of periodic amounts accrued in the year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable, is a priority claim in the bankruptcy that takes priority over the general unsecured creditors.
Therefore, the method of payment of spousal support is important when a payor spouse 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 year prior to bankruptcy receive priority after secured creditors, the Trustee’s administration fees and the superintendent’s levy.
Periodic arrears that accrued more than one year before the date of bankruptcy are provable, but do not have the priority over other unsecured claims.