Equalization: Bankruptcy and Property Claims

What happens if my ex declares bankruptcy before they pay me what they owe me?

When divorcing, there is a division of the value of property acquired during the marriage (“Net Family Property”). This is called equalization of net family property. To learn more about equalization, see our blog here.  When one of the parties is declaring bankruptcy, however, the property division gets somewhat more complex.  In this post, Jeffrey Sun, Fresh Legal intern and University of Ottawa law student, reviews what happens when a spouse declares bankruptcy.

Spouses Who Are Owed Equalization Payments Are Unsecured Creditors

You may be aware that support obligations survive bankruptcy. Unlike support obligation, an equalization payment is simply a debt owed, like any other, and it has no privileged place. What this means is that if you began a claim for equalization and your spouse is subsequently assigned into bankruptcy, then your claim is just like any other debt owed to an unsecured creditor.

Secured creditors (creditors with some sort of collateral agreement, e.g., a mortgage is secured by your house) are given priority over unsecured creditors. Once all secured creditors have been paid out, then unsecured creditors are paid with what is left over. You may get 10 cents on the dollar, for example, or some other proportion of what is owed to you as an equalization payment. You must negotiate this with the bankruptcy trustee directly.

The Timing of the Bankruptcy Matters

If the spouse is discharged from bankruptcy before the separation date, then the equalization process is not affected.

If the spouse is assigned into bankruptcy after the date of separation, but before an equalization payment is made, this is where the complexities come into view.

If your spouse has declared bankruptcy and you have not yet started a court application for equalization, you must seek the leave (permission) of the bankruptcy court to collect on that debt.  This is usually granted for family law claims.  Likewise, if you already commenced a proceeding, your action is automatically stayed because it is a proceeding that seeks money, and you will need leave to continue it.

Once you have leave (or if leave is not required), then you are free to pursue claims against your spouse’s property that is excluded from the bankruptcy.  This means you can seek payment from assets that do not vest in the trustee (e.g., RRSPs and pensions, minus contributions made in the last 12 months, are usually excluded from bankruptcy). If you pursue these protected assets, then how much you get will depend on (a) the value of the equalization payment in relation to the assets and (b) what other avenues you are pursuing.

In some cases, as an alternative to seeking leave and an interest in property beyond the reach of bankruptcy, some courts have remedied the loss of an equalization payment due to bankruptcy by simply increasing the amount and duration of spousal support.