Marriage Breakup in Bankruptcy – Spousal and child support.
A Review of Canada’s Insolvency Laws – was tabled in the House of Commons Tuesday, October 21, 2014. This is the start of proposed changes to the Bankruptcy and Insolvency Act. Equalization Debt and Vesting of Family Property Claims, are under consideration to be changed.
The Bankruptcy and Insolvency Act protects the rights of a spouse and child as follows:
- Support payments are a category of debts that cannot be forgiven in a bankruptcy.
- Support payments in arrears or lump sum payments, due in the 12 months prior to filing the proposal or the assignment in bankruptcy, receive payment ahead of the other unsecured creditors.
Equalization debt due to a spouse is erased upon the discharge of the bankrupt.
This has met with criticism because of its apparent injustice. Many have called for protection of equalization payments in bankruptcy by not having this debt discharged.
For example, pension benefits, life insurance proceeds in many situations and exempt Registered Retirement Savings Plans (RRSP) are exempt from seizure in a bankruptcy.
The effect of these exemptions has been to allow the debtor to avoid an equalization payment but maintain significant assets that are out of the reach of creditors.
Once the proposal has been fully performed or the debtor is discharged from bankruptcy, the equalization debt is extinguished.
The Canadian Association of Insolvency and Restructuring Professionals (CAIRP), who represent Canada’s Licensed Insolvency Trustees, recommends that equalization debt not be erased in a bankruptcy.
It further recommends that the stay of proceedings, which prevents collection action, remain unchanged and continue to apply to maintenance matters including claims for equalization or division of property against exempt assets.
Vesting of Family Property Claims.
Upon bankruptcy, all property of the bankrupt, as at the date of the bankruptcy, or property he might acquire before his discharge, with the exception of property exempt by provincial or territorial exemptions vests in the trustee.
Property can include the right to sue a former spouse for equalization claims or for the division of the matrimonial property. Some stakeholders have recommended that the right to sue remain with the former spouse but that any proceeds obtained from the action be distributed amongst the creditors.