How Does Bankruptcy Impact Property Division and Financial Support in a Divorce?

Financial problems, such as ever-expanding debt, can be a source of extreme stress for individuals and families in Canada, which is why they are often cited as a leading cause of divorce and separation. Conversely, divorce and separation can also prompt financial troubles, with families going from one shared household to two. In cases of high-conflict divorce, which may require prolonged litigation to resolve the various issues in dispute, the financial costs can add up quickly, leading to even more economic distress for the parties. Given that financial troubles and family conflict are often intertwined, some people may wonder how family law matters may be impacted if one or both spouses were to take the step of entering bankruptcy.

The truth is, bankruptcy can have a significant impact on a separation or divorce, whether it occurs prior to separation or afterward. Below, we will look at how the bankruptcy of one spouse can affect issues from the equalization of family property to spousal and child support.

Equalization vs. Division of Property Jurisdictions: A Key Distinction

The legislation governing how family assets are split between spouses after separation will play a significant role in how the bankruptcy of one spouse can impact the rights of the other spouse with respect to a claim for family property. As set out in the 2011 Supreme Court decision Schreyer v. Schreyer, each province in the country follows one of two models when it comes to sharing assets in a divorce:

1. The equalization model; or
2. The division of property model.

Based on which model a specific province follows, it can have a major effect on how the bankruptcy of one spouse post-separation can impact the property claim of the other.

The Equalization Model

The equalization model requires the parties to inventory and value their shared assets as of the date of separation and then equalize the difference in value between the spouses. In many cases, courts will strive to apportion the value equally between the spouses, but they also have the discretion to divide the value unequally if warranted. Under the equalization model, the spouses share and divide the value of the assets rather than the assets themselves. Neither spouse acquires “a proprietary or beneficial interest in the other’s assets”.

The Division of Property Model

In contrast to the equalization model, the division of property model does give rise to proprietary or beneficial interest in specific assets, rather than simply in the value of the assets. When a spouse has rights with respect to specific assets instead of rights to the value of shared assets, it has a dramatic impact on the timing of their claim, as illustrated below.

How Does This Affect a Spouse’s Claim Over Property in Bankruptcy?

The model used by a person’s respective jurisdiction makes a big difference to a spouse’s claim over said property in the event of bankruptcy based on whether the spouse’s claim is considered to be “provable in bankruptcy”. Under the equalization model, a spousal claim with respect to an interest in the value of shared property is considered “provable in bankruptcy”, making the spouse with the claim an unsecured creditor of the bankrupt person. This dramatically impacts the claimant spouse with respect to timing, as illustrated in Schreyer v. Schreyer.

In Schreyer v. Schreyer, the property claim had originated in Manitoba, a province that follows the equalization model. In that case, the husband and wife had separated, and the wife made a claim for equalization of property. Soon after, the husband filed for bankruptcy, but did not inform his former spouse of this fact. By the time the wife was moving forward with her property claim, the husband had been discharged from bankruptcy. While many of his assets had been seized to pay creditors, he retained ownership of his farm, which is an asset that is exempt from seizure under provincial enforcement legislation in Manitoba.

However, since the wife’s property claim was considered “provable in bankruptcy”, she had a duty to get in line with the husband’s other creditors during the bankruptcy proceedings for a share of the value of his assets. Since she did not, the Supreme Court held that she had missed her window to make a claim.

If a jurisdiction uses the division of property model, the spousal interest lies in the assets themselves as opposed to their value, and so the claim is not considered to be “provable in bankruptcy”. In this case, the spouse is not treated as an unsecured creditor, and instead can make a claim against any assets remaining once the debtor is discharged from bankruptcy.

Which model is used for sharing assets in Alberta?

The wording of the relevant clause under Alberta’s Family Property Act state as follows:

7(1)  The Court may, in accordance with this section, make a distribution between the spouses or adult interdependent partners of all the property owned by both spouses or adult interdependent partners and by each of them. [emphasis added]

In a “division of property” province, like Alberta, the spouse’s rights lie with the property itself and therefore are not considered to be “provable in bankruptcy” since a bankrupt’s actual assets are often seized or placed in the care of the trustee in bankruptcy. Since the claim is not provable in bankruptcy, a spousal property claim would be stayed for the duration of the bankruptcy period. Once the person is discharged from bankruptcy, the spouse with the claim may seek to realize their interest in whatever assets remain.

This was illustrated in a 2019 decision of the Alberta Court of Queen’s Bench called Re Marino, in which a woman sought to claim her interest in her former spouse’s pension. Since a pension is considered exempt from seizure under s. 88 of the Alberta Civil Enforcement Act, the husband had retained his pension after he was discharged from bankruptcy. As a result, the wife was not obligated to make a claim as an unsecured creditor during the bankruptcy and instead could move forward with her marital property claim once her former spouse had been discharged.

How are Claims for Spousal and Child Support Treated in Bankruptcy?

It is important to note that any orders or agreements with respect to spousal or child support obligations are not discharged in bankruptcy. Anyone considering bankruptcy should understand that if they have an existing obligation to make regular support payments, these obligations will not dissipate upon being discharged from bankruptcy. Further, the Family Responsibility Office may proceed with enforcement of support payments even if the spouse in arrears files for bankruptcy. Therefore, if the sole or primary source of a person’s debt is due to support arrears or obligations, bankruptcy is unlikely to provide significant relief.

Contact Mincher Koeman for Experienced and Compassionate Divorce Lawyers in Calgary

Whether a divorce is low-conflict or highly contentious, simple or complex, Mincher Koeman aims to ensure that our clients are steered towards the most efficient and amicable resolution possible. Our family lawyers are committed to treating your matter with empathy and skill, putting our considerable experience to work for you. We will always seek to provide a client with the most cost-effective solution appropriate for their given situation. We are highly experienced in all issues related to separation and divorce including family property, child and spousal support, as well as parenting matters. Please contact our office to make an appointment to discuss your matter with one of our divorce lawyers today by calling us at 403-910-3000 or by contacting us online.