Divorce and Bankruptcy Law in Canada

Navigating through Divorce and Bankruptcy Law in Canada

Navigating the labyrinth of Divorce and Bankruptcy Law in Canada can be a complex task, with several overlapping areas that require careful consideration and understanding. This article aims to provide comprehensive insight into the nuances of these laws, unpacking the implications of divorce and bankruptcy on joint debts, alimony, child maintenance, and personal assets.

The Intersection of Family and Bankruptcy Law

Family law and bankruptcy law are two distinct areas that frequently intersect, resulting in a complex web of financial and legal implications. Understanding these complexities is crucial, particularly for individuals who are navigating through a divorce while also grappling with bankruptcy.

The Impact of Bankruptcy on Alimony and Maintenance

In the realm of Divorce and Bankruptcy Law in Canada, bankruptcy does not absolve individuals from outstanding alimony or child support payments. This is in accordance with section 178 (1)(b) of the Bankruptcy & Insolvency Act.

Alimony and Maintenance Arrears

The spouse who is owed back support payments can stake a claim in the bankruptcy and receive a proportion of any ‘dividend’ paid from the estate. Any alimony or support arrears for the 12 months before the date of bankruptcy are regarded as a preferred claim, and are paid from the proceeds of the bankrupt estate before any other unsecured claims. Any remaining balance is still owed by the paying spouse.

Equalization Payments

Equalization payments, which are due under the terms of a divorce or separation agreement, are treated like any other unsecured debt. These are eliminated by filing bankruptcy, further highlighting the intricate interplay between divorce and bankruptcy laws in Canada.

Considerations for Support or Alimony Payments

Support and alimony payments are accounted for when calculating surplus income. This could potentially lower your net income, reducing any surplus income payment you may need to make in a bankruptcy.

Timing of Bankruptcy Filing During Divorce

Timing plays a significant role in determining the entitlement of creditors to any assets that may be part of a divorce agreement. The order in which you file for bankruptcy and finalize your divorce has a direct impact on the distribution of assets.

Bankruptcy Filed Before Divorce

If bankruptcy is filed before the divorce is finalized, your assets are transferred to your bankruptcy estate. Consequently, these assets are no longer available for distribution in a divorce.

Divorce Finalized Before Bankruptcy

On the other hand, if the divorce is finalized before bankruptcy, and assets are transferred to an ex-spouse as part of a Family Court Order or legal separation agreement (assuming no fraudulent intent), these assets are no longer available for your creditors in the bankruptcy.

Handling Joint Debts Post-Bankruptcy

Joint debts cannot be erased by a divorce or separation agreement. As such, debts owed by both spouses before the divorce will still be considered joint debts after the divorce. If one spouse files for bankruptcy, creditors can pursue the other spouse for payment of a joint debt, irrespective of the terms of the divorce agreement.

To eliminate a joint debt, your lender must agree to remove one spouse from any debt they co-signed or guaranteed. This includes joint credit cards.

Addressing Debt Issues in a Divorce Situation

A divorced or separated couple can file a joint bankruptcy or joint consumer proposal to eliminate combined debts. This approach is not uncommon for dealing with joint debts owed by a couple who can no longer repay these debts due to their divorce and a change in their financial circumstances.

Whether a bankruptcy or consumer proposal is suitable for you or your ex-spouse requires an assessment of each of your individual financial obligations.

Conclusion

Navigating through the intricacies of Divorce and Bankruptcy Law in Canada can be a challenging task. It is advisable to consult with a local Licensed Insolvency Trustee, either individually or jointly, to find the right solution when one or both of you cannot repay your pre-divorce debts.

Remember, understanding your rights and responsibilities is the first step towards making informed decisions and achieving a fair and equitable resolution in a divorce and bankruptcy situation.

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