What Happens to the Liability for Equalization Payments in a Consumer Proposal or Bankruptcy?
Coping with an insolvency situation can be stressful, but when the process overlaps with family law issues such as a spousal claim, it’s important to understand how it interacts with things such as liability for equalization payments.
So to help you out, we’ve put together this article that explains some of the concerns you should keep in mind when facing insolvency and spousal claims.
Family Law Acts
The Family Law Act can differ slightly between provinces.
In Ontario, the Family Law Act will attempt to divide the assets that the couple has accumulated.
This often results in one spouse becoming a creditor to the other.
Property is generally not taken into consideration during this division.
Assets are also only transferred if agreed upon by both parties.
If there is a dispute, then the Court may intervene and decide for both parties.
Since there can be some minor differences depending on your province, it’s worth contacting a trustee to learn more about.
There may be further considerations to keep in mind, such as “business” properties and assets.
Bankruptcy and consumer proposals
In the case where a bankrupt party owes their non-bankrupt spouse an amount for equalization, the non-bankrupt spouse will become an unsecured creditor with no priority.
This occurs only in the transfer of assets or granting an interest in the assets outside of Court.
In the case of a consumer proposal, the non-bankrupt spouse will still be considered an ordinary unsecured creditor.
In addition, they’ll only be able to vote against the proposal.
If the couple separates after the date of bankruptcy or the date that their consumer proposal is filed, the spouse will not be able to file a claim in bankruptcy or the proposal, and they won’t be able to share in any of the dividends.
Equalization payment recipients
If you’re the recipient of equalization payments and you file for bankruptcy, the entitlement to the equalization payments will be entrusted to the insolvency trustee.
This only accounts for the payments and not support.
The trustee will also pursue collection of the equalization payment and distribute it between the creditors.
On the other hand, if you’re the recipient of equalization payments and you file a consumer proposal, you can keep any equalization payments that are due and owing.
However, when deciding an amount to offer creditors (as per the consumer proposal) the administrator of the proposal will consider their chance of collecting their equalization payment.
If you’d like to learn more about liability for equalization payments in a consumer proposal or bankruptcy, don’t hesitate to get in touch with us today for more information.
We’d be happy to guide you through the process and also explain some of the intricacies regarding equalization payments when in a consumer proposal or bankruptcy.