When two people separate and initiate divorce proceedings, under the Family Law Act the value of their assets accumulated during the marriage (potentially including any house, vehicle, investments, etc.) are calculated and divided with the advice of their lawyers and the court. This is a process known as the “equalization of assets”.
An equalization of assets basically means that whatever belongs to each party is distributed fairly and equally between the spouses. Most assets cannot be cut up and shared, so one party may have to pay money to create fairness. This obligation is called an equalization payment. The equalization is a debt owed by one spouse to another. But what happens when the person owing this equalization payment to their ex-spouse runs to seek protection from their creditors through the filing of a consumer proposal or a personal bankruptcy? the result can be that the other spouse becomes a creditor under their bankruptcy filing or consumer proposal. It’s important to remember that this is not spousal or child support but an entirely separate issue.
Effectively, the non-bankrupt spouse would end up becoming an ordinary unsecured creditor (no different than any other creditor) in their spouse’s bankruptcy. And in the case of the filing of a consumer proposal, the other spouse would still be an ordinary unsecured creditor and would be allowed to vote on the acceptance of the proposal. The downside to this? The spouse would only be able to vote against the proposal not in favour of it.
One further complication: If Spouse A is owed an equalization payment by Spouse B and files a bankruptcy, the entitlement to the equalization payment (but not any child or spousal support) will vest with the Insolvency Trustee. The trustee will pursue collection of the equalization payment from Spouse B and distribute it among the bankruptcy’s creditors.
In the case of Spouse A filing a consumer proposal the rules are a bit different. In a consumer proposal, the spouse who is the recipient of an equalization payment is entitled to keep any equalization payments due and owing. However, when arriving at an amount to offer creditors under the proposal, the Administrator of the proposal will consider the chances of collecting on that equalization payment.
It’s also important to be clear on the rules surrounding the date a proposal or bankruptcy are filed with the court by the Trustee on behalf of either party. If the spouses separate after the date one of them files for bankruptcy or a Consumer Proposal, that spouse would not be able to file a claim in the bankruptcy or the proposal or share in any of the dividends.
For clarification on these issues, it’s best to speak with one of our Farber team members. We can help you determine the best course of action. Our debt solution professionals and licensed Insolvency Trustees can provide you with a FREE CONSULTATION. Just click the button, below, or give us a call so we can review your situation with you at your convenience.