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Bankruptcy and divorce: Equalization payment introduction
The pandemic has taken a toll on couples both financially and psychologically, which has actually triggered many to consider going for separation and maybe even filing for bankruptcy. This is not to say that every bankruptcy causes a subsequent divorce, or that every separation will certainly necessitate the declaring of bankruptcy.
In my Brandon Blog dated March 2, 2020, titled “DIVORCE DEBT: NOT ALL EQUALIZATION ISSUES ARE EQUAL IN BANKRUPTCY” I described a decision of the Ontario Superior Court of Justice (Commercial List) where the court decided that the claim for an equalization payment is “personal as between the spouses” and cannot be started by the licensed insolvency trustee. However, if the claim was already started by the spouse prior to his or her bankruptcy assignment, then it is a claim for property that the Trustee can continue to advance.
I thought that was the end of the matter, but apparently not. The bankruptcy trustee, who could have left well enough alone, did not. The trustee in bankruptcy appealed the court’s decision to the Court of Appeal for Ontario. Recently, the three-judge panel released their decision of the appeal that was heard last November.
In this Brandon Blog, I discuss this recent Court of Appeal for Ontario decision dealing with an equalization payment, marital property, divorce and bankruptcy in Ontario.
Bankruptcy and property: Insolvency 101 on what happens to property in a personal bankruptcy
It is a fact that when someone files for personal bankruptcy, the bankruptcy provisions states that all of their property vests in the licensed insolvency trustee administering the file. There is a discrete list of assets set by every province in Canada that is exempt from seizure and therefore cannot be sold by the Trustee. Technically, the licensed insolvency trustee gives back to the bankrupt that property. In practical terms, the Trustee never seizes it. But whenever the topic of bankruptcy under federal bankruptcy laws gets mixed in with the Ontario Family Law Act, R.S.O. 1990, c. F.3 (“FLA”), the discussion on matters about bankruptcy always starts to get murky.
A claim for an equalization payment by one spouse against the other in Ontario family law proceedings meets the definition of property. So if the spouse entitled to the equalization payment files an assignment in bankruptcy, that entitlement is their property which now vests in their licensed insolvency trustee. When collected upon, it is available to the bankruptcy estate and its creditors. However, what if that spouse has yet to make the equalization payment claim and goes bankrupt? Does the Trustee have the right to assert that claim?
What are equalization payments in divorce?
In Canada, each province sets their own family law statutes. When it comes to family property and divorce, there are two different possibilities in Canada. The province can elect for those divorcing spouses to have to split their property equally. This would make them a division of property province under family law.
Alternatively, rather than looking for a division of assets, the province can mandate that each spouse calculate their respective net family property. Then the spouse with the higher net family property value has to either pay money or transfer property to the other spouse so that they end up being equal. Hence the money that would be paid over from one spouse to another is called the equalization payment. This is what happens in Ontario. Ontario is not a property division province but rather is an equalization jurisdiction.
The application for equalization and the equalization payment is totally separate from the claim for and determination of spousal support and child support to the other. The equalization claim falls into the category of non-support-related spousal claims.
Rusinek & Associates v. Arachchilage & Baliah, 2020 ONSC 1090 (CanLII)
In my March 2020 blog referred to above, I described this Ontario family law case combined with the insolvency situation of bankruptcy. You can certainly read it if you want all the details. However, the bottom line of that decision is that under the FLA, the post-separation equalization claim is “personal as between the spouses”.
This means that if a spouse who subsequently becomes bankrupt had not yet made that claim, his or her Trustee cannot start the claim for the determination of equalization on the basis that the claim is a property that vests in the Trustee. However, if the claim had already been made and the equalization process litigation has already begun, and then that spouse becomes bankrupt, the Trustee does take over the right to advance that litigation against the non-bankrupt spouse for the equalization payment which stands in lieu of property rights. Whatever payment comes from it goes to the Trustee for the general benefit of the creditors.
Bankruptcy and equalization payments: Court of Appeal for Ontario says the timing of the bankruptcy matters
From what I have told you so far, you can see that the timing of the person’s voluntary assignment into bankruptcy or the Bankruptcy Order being made (from the filing of a Bankruptcy Application) does matter. For the trustee in bankruptcy to be able to assert that equalization payment claim, the bankrupt spouse had to have already made that claim prior to becoming bankrupt.
The Court of Appeal for Ontario considered the Trustee’s appeal of this lower court decision. It considered the laws around bankruptcy and the FLA and dismissed the appeal. I will now tell you why.
The Court of Appeal stated that a spouse’s claim for equalization becomes property of the bankrupt if that same spouse then declares bankruptcy. The action vests in the trustee in bankruptcy and the Trustee has control over the claim together with the right to get any unpaid equalization payment.
There is no restriction in the Bankruptcy and Insolvency Act (BIA), under the FLA or in the common law, preventing the trustee in bankruptcy from going after it after the now-bankrupt spouse had already started that part of the Family Law litigation.
[NOTE: This bracketed portion is not part of the case heard by the Appeal Court, but this is the appropriate place to share this information with you. I think it is obvious that the bankrupt spouse would not start the equalization claim litigation while being an undischarged bankrupt. Otherwise, the Trustee would be entitled to the proceeds.
Also, presumably, the bankrupt spouse might do better if the non-bankrupt spouse only paid support instead of both support and equalization. I would advise the bankrupt’s family law lawyer to not make an equalization claim, and in return, negotiate for a larger support claim, in lieu of both.
A Trustee cannot directly attach to a support claim. The Trustee would just have to assess that information, along with whatever other income the bankrupt spouse has, to determine if there is any surplus income obligation.]
The Court then went through a thoughtful analysis of whether the entitlement to equalization can be initiated by the licensed insolvency trustee. The Court of Appeal concluded that because the action for equalization is “personal as between the spouses”, only spouses can bring claims for equalization. The Trustee cannot.
It is for these reasons that the Court of Appeal for Ontario confirmed the lower court decision, dismissed the Trustee’s appeal and awarded costs of $10,000 against the Trustee in favour of the non-bankrupt spouse respondent.
I will now go on to provide you with some extra information about divorce proceedings and bankruptcy.
How does an unpaid equalization payment intersect with bankruptcy?
In a bankruptcy, if the non-bankrupt spouse still owes the bankrupt spouse an unpaid equalization payment, the bankruptcy plays no part. That spouse still has to make the payment. Only now, it has to be made to the Trustee.
However, if the spouse who files for bankruptcy owes the non-bankrupt spouse an unpaid equalization payment, that liability is caught in the bankruptcy. The non-bankrupt spouse has a provable ordinary unsecured claim in the bankruptcy of the spouse. As stated above, the bankrupt spouse no longer has to make the equalization payment because it is an unsecured debt and will be discharged from that person’s discharge from bankruptcy.
What happens to spousal and child support payments during bankruptcy? Nothing. Any liability for support, either spousal support or child support, is not eliminated by filing bankruptcy. The bankrupt spouse still has to make those payments. Just like any other spouse, if the bankrupt spouse does not make the support payments, the spouse that is entitled to receive support can obtain collection assistance from the Ontario Family Responsibility Office.
What happens to joint debt if you file for bankruptcy?
Joint debt in a divorce is hard enough to sort out. Layer a bankruptcy on top of that and things may become much clearer, but also potentially unfair. When you file for bankruptcy and have joint debt, it is important to know what happens to the debt. The most common type of joint debt couples share is from joint credit cards. Next would be if one spouse co-signed for or otherwise guaranteed the debts of the other spouse. Other common examples are joint mortgages and joint lines of credit.
A creditor can collect the debt from both you and your co-signer, but in your bankruptcy, the law does not protect your non-bankrupt co-signer from your joint debt. If you file for bankruptcy, your creditors can still come after your co-signer for the debt.
If your estranged spouse is considering bankruptcy as a last-ditch effort to eliminate their overwhelming unsecured debt, it could spell trouble for you if they file for bankruptcy. When they file for bankruptcy, they are trying to erase their unsecured debt. Unfortunately, you will be saddled with the sole responsibility to repay those joint debts. You will have to try as best you can to be protected financially through the divorce process.
You need to decide how you will deal with these debts that your spouse won’t have to pay because of their bankruptcy. If you cannot afford to pay them on your own, in addition to your other living expenses, you may have to consider either bankruptcy or a consumer proposal as an option to save you from this catastrophe.
Are the bankruptcy rules fair, especially given the discussion above about the equalization payment? The BIA is the set of regulations and rules that govern a bankruptcy or insolvency in Canada. The BIA governs both people and companies that have come to be incapable to pay their financial debts. It handles the regulations for the time duration both leading up to insolvency and the declaring of bankruptcy.
The policies established by the BIA have a substantial impact on the lives of debtors and creditors. They are extremely crucial for the survival of the business or person. The rules are fair for everyone. But the effect they have on different stakeholders in an insolvency file may not be very fair.
Equalization payment and Ontario divorce and bankruptcy summary
I hope you enjoyed the equalization payment Brandon Blog post. You may be very frustrated and angry over your marital and financial situations. The entrepreneur may be very frustrated that the company can no longer pay all its debts as they come due.
There may be sufficient value to take care of the secured creditor, but nothing for anyone else, including the unsecured creditors. There may be some business units that should not survive, but if cut out, the business will be viable. A receivership might very well accomplish the goals for the entrepreneur also. I have many times structured a receivership process, in order to meet the goals of the entrepreneur, while satisfying the requirements of the secured creditor.
Are you worried because you or your business are dealing with substantial debt challenges and you assume bankruptcy is your only option? Call me. It is not your fault that you remain in this way. You have actually been only shown the old ways to try to deal with financial issues. These old ways do not work anymore.
The Ira Smith Team utilizes new modern-day ways to get you out of your debt difficulties while avoiding bankruptcy. We can get you the relief you need and so deserve.
The tension put upon you is big. We know your discomfort factors. We will check out your entire situation and design a new approach that is as unique as you and your problems; financial and emotional. We will take the weight off of your shoulders and blow away the dark cloud hanging over you. We will design a debt settlement strategy for you. We know that we can help you now.
We understand that people and businesses facing financial issues need a realistic lifeline. There is no “one solution fits all” method with the Ira Smith Team. Not everyone has to file bankruptcy in Canada. The majority of our clients never do. We help many people and companies stay clear of bankruptcy.
That is why we can establish a new restructuring procedure for paying down debt that will be built just for you. It will be as one-of-a-kind as the economic issues and discomfort you are encountering. If any one of these seems familiar to you and you are serious about getting the solution you need, contact the Ira Smith Trustee & Receiver Inc. group today.
Call us now for a no-cost consultation.
We will get you or your business back up driving to healthy and balanced trouble-free operations and get rid of the discomfort factors in your life, Starting Over, Starting Now.
We hope that you and your family are safe, healthy and secure during this coronavirus pandemic.
Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
equalization payment