Equalization payment, divorce, Ontario:
The basic rule for marital property and bankruptcy. We hope that you and your
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Bankruptcy and Property Equalization payment Introduction.
It is a fact that when someone files
for personal bankruptcy, the bankruptcy provisions state 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 (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 is 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?
In my Brandon's Blog dated March 2nd 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 but 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.
The purpose of this Brandon's Blog is
to go over the issues and report on the decision of the appellate court.
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 a 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 a 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 I 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 in 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 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 ten thousand
dollars 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 a 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 filed
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 a non-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 cosigner.
But in your bankruptcy,
the law does not protect your non- bankrupt cosigner from your joint debt.
If you file for bankruptcy,
your creditors can still come after your cosigner 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?
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 in Ontario.
divorce and bankruptcy summary.
I hope you enjoyed the equalization payment Brandon's 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
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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.
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The majority of our clients never do.
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If any one of these seems familiar to you and you are serious about getting
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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.