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What Happens to the Liability for Equalization Payments in a Consumer Proposal or Bankruptcy?

Care must be taken when looking at examples of what has happened to non-support related spousal claims in an insolvency situation.

Ontario is an equalization jurisdiction

The Family Law Act tries to divide the accumulation of net assets during the marriage, usually resulting in one spouse becoming a creditor of the other. There is no actual division of property or acquisition of a beneficial interest in any of the property. Assets are only transferred as agreed upon by the parties, or as ordered by the Court.

Outside of Court, ordering the transfer of assets or granting an interest in the assets, where a bankrupt owes the spouse (who is not a bankrupt) an amount for equalization, the non-bankrupt spouse will become an ordinary unsecured creditor with no priority.

In a Consumer Proposal, the non-bankrupt spouse would still be an ordinary unsecured creditor and, in terms of being able to vote on the proposal, the spouse would only be able to vote against the proposal.

If the parties separate after the date of bankruptcy or the date of the Consumer Proposal, the spouse would not be able to file a claim in the bankruptcy or the proposal or share in any of the dividends.

If the recipient of an equalization payment files for Bankruptcy, the entitlement to the equalization payment (but not support) will vest in the Insolvency Trustee. The trustee will pursue collection of the equalization payment, and distribute it amongst the creditors.

If the recipient of an equalization payment files a proposal, the recipient 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.