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What happens when your former spouse declares bankruptcy or files a consumer proposal and equalization payments are still owing?

From time to time 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 support recipient?

Spousal Support and Child Support

Spousal Support and Child SupportIn the case of spousal support and child support, the government has on public policy grounds, sought to protect the recipient(s) by putting those payments in a category of debts that cannot be forgiven. They have even gone one step further by allowing the support recipient(s) to receive payment ahead of the other unsecured creditors for any support arrears or lump sum support amount due in the 12 months prior to filing the proposal or the assignment in bankruptcy.

Unfortunately, the legislators have not seen fit to provide the same protection when it comes to equalization. The result of this can often be harsh in that 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 contributions other than those made in the 12 months preceding the proposal or assignment in bankruptcy.

The effect of these exemptions has been to allow the debtor to avoid an equalization payment but maintain significant assets that are out of the reach of creditors. Once the proposal has been fully performed or the debtor is discharged from bankruptcy, the equalization debt is extinguished.

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

In a recent decision of the Ontario Superior Court of Justice (re Legallais, 2015 CarsewellOnt 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 Bankruptcy and Insolvency Act.

Until the Bankruptcy and Insolvency Act is amended, it appears that there is potential for unfairness in the division of family assets in the event of insolvency of the payor.

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