Looking at the statistics on the breakdown of marriages and partnerships and the financial impact on people’s lives, we thought it would be helpful to review how Support Orders are treated under a bankruptcy.
Treatment of Support Payments in Bankruptcy
Under the Bankruptcy and Insolvency Act, spousal support is treated as follows:
- Support obligations are not extinguished by the bankrupt’s discharge: S.178.
This includes cost orders that were awarded in connection with obtaining or enforcing a support order, or the portion of a cost order that relates to such support issues.
- 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. : S136 d(1)
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 accrued in the year before the bankruptcy, plus any lump sum that is payable.
How are these support payments normally enforced?
When a spouse responsible for paying support, files for bankruptcy, one of the options open to the spouse who is the recipient of the support payment, is to use The Family Responsibility Office (the “Office”). This was created pursuant to the Family Responsibility and Support Arrears Enforcement Act (the “Act”). The Office 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 data banks, and by agreement, certain federal data banks concerning the payer’s place of employment, address or location where he or she may be found;
- The Act recognizes a garnishment process from jurisdictions outside Ontario and provides a mechanism for a foreign support creditors to garnishee moneys owed to the payer;
- The Act enables the Office to sell the property, as though it were a sale under a mortgage;
- The Office 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 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 support recipient 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 to the support recipient.
Other options for the Support Payment Recipient
Pursuant to S136.(1) (d.1) of Bankruptcy and Insolvency Act, a claim for spousal or child support is 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 spouse’s equalization claim (if any) or any other unsecured claims, and will be paid in priority to such claims. Therefore, it is probably worthy efforts 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, contact us for a free, no-obligation consultation. One of our licensed debt relief professionals will evaluatuate your debts, assets, and obligations, and help you to find the best way to get out of debt and/or protect your assets.