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Family Law - Equalization Payments & How They Are Handled When Someone Is Insolvent

What happens if your former spouse declares bankruptcy, or files a consumer proposal, and equalization payments are still owing?  Occasionally it happens that following long and drawn-out divorce proceedings, one of the parties is forced to file a proposal to his or her creditors or in some cases, make an assignment in bankruptcy. The question is, where does that leave the other spouse, the support recipient?

In the case of spousal support and child support, the government has sought to protect the recipient(s) by putting those payments in a category of debts that cannot be forgiven. They have even taken things further by allowing the support recipient(s) to receive funds ahead of the other unsecured creditors for any support arrears owing. And any lump sum support amount due in the 12-month period prior to the filing of the proposal or the assignment in bankruptcy must also be paid out to the support recipient ahead of the other creditors (the companies owed money to).

Unfortunately, the legislators have not seen fit to provide the same protection when it comes to the issue of equalization payments in a divorce settlement. The result? A problem for the equalization recipient, as there are many assets that are protected from creditors for public policy reasons (for example, pension benefits, life insurance proceeds in many situations and RRSP (Registered Retirement Savings Plan) contributions other than those made in the 12 months preceding the proposal or assignment in bankruptcy.

This lack of legislative clarity effectively means a debtor filing a consumer proposal or a bankruptcy can avoid having to pay an equalization payment while at the same time holding on to significant assets that are out of the reach of their creditors. And once a proposal has been fully performed (i.e., successfully completed) or the debtor is discharged from their bankruptcy, the equalization debt itself is discharged.

Some lawyers have sought to circumvent this unfairness by inserting additional insolvency clauses into separation agreements. These clauses provide that, in the event of an insolvency, the party owing an equalization payment agrees that any unpaid portion shall be treated as lump sum spousal support and may be enforced as such.

But not so fast! In a recent decision of the Ontario Superior Court of Justice (re Legallais, 2015 Carsewell Ont 11533, 256 A.C.W.S. (3d) 268), the Court reviewed a claim for support based on one of these clauses and determined that the clause could not be used to circumvent the federal Bankruptcy and Insolvency Act.

The end result?  Until the Bankruptcy and Insolvency Act is effectively amended, it appears that there is potential for some unfairness in the division of family assets in the event of insolvency of the debtor. 

If you need some clarification on this, please do not hesitate to reach out to our Licensed Insolvency Trustees. We will review your situation and give you advice on your rights and what actions you might wish to take.  If you’d like to meet with one of our professionals, just click the FREE CONSULTATION button, below, or give us a call today.  We are here to help you!