Bankruptcy and Alimony – What You Need To Know

There is a common belief that by filing bankruptcy a person can “get out” of their obligation to pay alimony and child support.  This is simply not true.

Filing bankruptcy in Canada eliminates most unsecured debts. However there are certain debts that are specifically not discharged by the Bankruptcy and Insolvency Act and child and spousal support arrears are one of them. To make things even more complicated, alimony and child support payments fall into a special category of claims in bankruptcy that receive priority repayment.

Alimony and Support Payments

In 1997 alimony and support claims were made provable in bankruptcy, but not dischargeable.  By being provable, the claims could be submitted to the trustee by the spouse owed outstanding payment so that they could receive their share of any money coming out of the bankruptcy.  By declaring the debts not dischargeable, it meant that unlike other debts that are eliminated by bankruptcy, alimony and support debts survive the process.

The government went further by declaring any alimony or support arrears for the 12 months immediately preceding the date of bankruptcy as preferred claims.  These claims are paid in priority to other unsecured claims.  All other alimony and support arrears are treated like any other unsecured claims, except they survive the bankruptcy if they are not repaid in full.

Equalization Payments

Having explained how safe alimony and support payments are, I should warn you, payments for equalization are not currently protected under bankruptcy law.

The idea behind equalization payments is to balance the material gains a couple experience during their marriage in a divorce or separation.  The things that the spouses own are listed and valued.  The spouse with the higher value is required to make a payment or transfer to the spouse with the lower value.  When you file for bankruptcy, equalization payments are debts that are included in the bankruptcy. They are treated just like a credit card or other unsecured debt.  In other words, whatever portion remains unpaid, after any dividend payments from the bankruptcy, is eliminated once the person declaring bankruptcy is discharged.

Joint Debts

It is also important to understand that divorce or separation agreements to pay off joint debt are not upheld by bankruptcy (or by your secured creditors either).  Just because a divorce or separation agreement requires one spouse to pay off a joint debt, it doesn’t not absolve the other spouse from the obligation to pay.  I have seen hundreds of cases were the spouse required to pay off a joint debt filed for bankruptcy which caused the other spouse to repay the debt in full (which usually means they end up filing for bankruptcy too).

If you have joint debts that are to be apportioned during a divorce, it is important to get your creditor to agree, in writing, to remove the other spouse from any obligation to pay as well.

Court Orders

Here’s a final bit of advice.  Neither Bankruptcy nor Family Court will overwrite or undo Orders issued by the other Court.  That means:

  • if a separation agreement or Divorce Order has been released before someone files for bankruptcy then the Bankruptcy Court will not attack the transfer of assets, even if it is done within the reviewable period before a bankruptcy.
  • if a person has filed for bankruptcy then any assets they may have owned will be signed over to their bankruptcy – they are no longer available to be dealt with in a separation agreement or Divorce Order.

Careful planning is required before you file for bankruptcy and/or separation or divorce to deal with all of the matrimonial property in the most advantageous manner.

In Summary

The law around bankruptcy and divorce can get quite complicated but in general:

  • Alimony and support payments are not stopped when a person files for bankruptcy and any arrears survive the bankruptcy process.
  • Equalization payments are stopped when a person files for bankruptcy and any unpaid equalization payment is eliminated at the end of bankruptcy.
  • Co-borrowers become responsible to repay 100% of the joint debt if one of the borrowers files for bankruptcy, regardless of whether or not a separation agreement or Divorce Order required the first borrower to repay the debt in full.
  • Whichever comes first, bankruptcy or separation agreement and/or Divorce Order ranks in priority when dealing with the things a person owns.

Financial Recovery Process

Although bankruptcy does not eliminate alimony and support payments, it is still not unusual for someone who owes back support payments to look to bankruptcy, or a consumer proposal, as a financial solution.  If they owe significant other debts as well, bankruptcy can help eliminate previously build up credit card debt, lines of credit and other unsecured debts that an individual, now divorced and living on a single income, can no longer support. In the event that they have assets, including a home or car, that they would like to keep, a consumer proposal is another option.  By eliminating other marital or subsequent debts by filing bankruptcy or a consumer proposal, it is possible to improve your financial circumstances enough that meeting your support payments is much easier.

If you have questions about how a bankruptcy or consumer proposal can help in the financial recovery process after divorce, Ted can be reached through our website hoyes.com

Ted Michalos is a Chartered Professional Accountant (CPA) and a Licensed Bankruptcy Trustee. As a co-founder & President of Hoyes, Michalos & Associates, he speaks regularly at local commerce and professional events about insolvency issues and has testified before the Canadian Senate on issues of bankruptcy legislation. His expertise focuses primarily on helping individuals solve their financial problems.

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