Date 13.09.13
If we take a hard look at the statistics on the break-down of marriages and partnerships and the monetary impact they have on people’s lives, it quickly becomes clear that separation and divorce often create major financial upheaval in people’s lives. Therefore, we thought it would be helpful to review how Support Orders are treated in a bankruptcy.
Warning! Legalize ahead!
Family Law usually deals with three distinct types of support orders: child support (for the benefit of the children of the marriage), spousal support (for the benefit of the ex-spouse of the marriage) and extraordinary expenses for the children (special needs items, daycare and camp costs, extra-curricular lessons, and classes, and even items such as prescription glasses and medications).
Under the BIA (Bankruptcy and Insolvency Act), Support Orders are treated as follows:
Support obligations are not extinguished by a bankrupt’s discharge from their other debts: S.178 of the BIA makes this clear. This exemption includes costs that were awarded by the Family Law court in connection with obtaining or enforcing a support order (or the portion of a cost order that relates to such support issues). Anyone who decides to file for bankruptcy protection from their creditors in the hope they can escape their child or spousal support responsibilities will be sorely disappointed by the BIA legislation.
Some support arrears are provable in bankruptcy, just like ordinary unsecured creditors, entitling the support creditors to a dividend, if any: S.121(4): Provable support arrears allow the support claimant to participate in the benefits of the bankruptcy. The holder of a provable support claim falls within the definition of “creditor” under the BIA, and is entitled to oppose the discharge, issue a bankruptcy petition, take proceedings under BIA s. 38 where the trustee refuses to act, and receive dividends.
Support enforcement is not stayed by the bankruptcy, except against any property that vests in the Trustee: S.69.41. Property that is still available for support enforcement during the bankruptcy includes the following: exempt assets; wages or self-employed earnings; income tax refunds; RRSP’s, wrongful dismissal awards and severance pay. Unless the trustee has already obtained a court order giving him or her priority over these items, a support claim can be pursued against them during and after the bankruptcy.
Some support arrears (any lump sum, and any periodic arrears in 12-month period before bankruptcy) are entitled to a preference, paid ahead of all other unsecured creditors, but behind certain other claims. Section 136 grants preferred status within the administration of the bankruptcy, in fifth position, to a portion of the provable support arrears. That portion consists of any periodic arrears which have been accrued in the year before the bankruptcy was filed, plus any lump sum that is payable.
How are these support payments normally enforced?
When a spouse, who is responsible for paying support, files for bankruptcy, one of the options open to the spouse receiving the support payment, is to utilize the services of The Family Responsibility Office (the “FRO”). This organization was created at the direction of the Family Responsibility and Support Arrears Enforcement Act (the “Act”). The FRO can enforce the collection of support payments through a variety of remedies:
- The Office can enforce support orders and support deduction orders at no cost to the support recipient.
- The Office is entitled to information from all provincial databases, and (by agreement), certain federal databases concerning the payer’s place of employment, address, or the location where he or she can be found.
- The Act recognizes a garnishment process from jurisdictions outside Ontario and provides a mechanism for a foreign support creditor to garnishee moneys owed to the payer.
- The Act enables the FRO to sell the property, as though it were a sale under a mortgage.
- The FRO has the authority to suspend the payer’s driver’s license, if the payer continues to default under the support orders; and
- The Act permits garnishment against the Crown including CRA (Canada Revenue Agency) where moneys are owing to the payer, and it changes the priority for support orders to bind the Crown with respect to a distribution under the Creditor’s Relief Act.
Support orders are automatically filed with the Family Responsibility Office unless the parent or spouse receiving the support chooses to withdraw it. In addition, the support deduction order is directed to an income source that is required to pay money to the Office that is owing to the payer. In other words, the payer must make payments to the Family Responsibility Office and not send them directly to the receiving parent or spouse.
Other Options for anyone receiving Support Payments
Pursuant to S136. (1) (d.1) of Bankruptcy and Insolvency Act, a claim for spousal or child support is considered a preferred claim, for periodic amounts accrued in the year before the date of proposal, together with any lump sum amount payable. On distribution, any preferred claim will have a higher ranking than a spouse’s equalization claim (if any) or any other unsecured claims and will be paid in priority to such claims. Therefore, it is worthwhile for the support payment recipient to file a preferred/unsecured claim with the Licensed Insolvency Trustee if there are significant assets realized at the estate.
A support claimant with provable claims is a creditor under the BIA. Therefore, he or she is entitled to exercise creditors’ rights in bankruptcy, including, but not limited to, opposing the discharge, taking proceedings under BIA s. 38, and receiving the dividend.
To learn more about obligations and support orders under bankruptcy, whether you are a parent who must pay child and spousal support or the parent or spouse receiving such support, please click on the FREE CONSULTATION button, below, to set up a no-obligation consultation with one of our licensed professionals.
They can evaluate your debts, assets, and obligations, and explain your rights and your obligations under the BIA clearly. Our goal is to help you to find the best way to cut through all the red tape and make sense of the legislation in place.