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Husband Declares Bankruptcy One Week After Support Order – Is He Off the Hook?

 

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Husband Declares Bankruptcy One Week After Support Order – Is He Off the Hook?

Lately we have reported on a few cases involving the interplay between Family Law obligations and bankruptcy Husband Repays Almost $1 Million to Bounce Back from Bankruptcy – Yet Ordered to Keep Supporting Wife and What “Material Change” is Not: Some Real-Life (and Perhaps Surprising) Examples.  Quite coincidentally another decision, issued just last week by the Ontario Bankruptcy Court, continues the mini-focus on this area of law.

This time, however, the question for the Bankruptcy Court (which does not hear Family Law issues per se) was whether a husband who declared bankruptcy a mere week after having a hefty spousal and child support order levied against him should be allowed to have that bankruptcy discharged. His former wife was opposed; she claimed that the husband had hidden his true income during their divorce litigation, and that he was still hiding income now.

The facts were fairly straightforward: The husband, who was what the court called a “skilled barber”, ran a hair styling business during the marriage. There was evidence – including the report of a forensic auditor that the wife was forced to hire – suggesting that he earned about $225,000 per year, a large portion of which had been hidden from the wife and which had come from “cash” transactions (i.e. unreported income). The wife earned about $17,000 annually.

When the husband filed for divorce, he was ordered to pay temporary support for the couple’s three children, but fell into heavy arrears. In early 2012 he was given a final order to pay support of about $4,000 per month, plus another $25,000 in legal costs.

However, just one week after that order was made, the husband filed for bankruptcy. At that point, he owed about $160,000 in unpaid support.
He later went to Bankruptcy Court to get his bankruptcy discharged. He claimed to be now working as an employee (rather than running his own business), claimed to be paying a full 50% of his wages to the Family Responsibility Office (via garnishment), and assured the court that it could place greater confidence in the accuracy of the new, much lower income level he was currently reporting through his employer.

To assess whether to grant the husband the discharge he sought, the court examined the provisions of the federal Bankruptcy and Insolvency Act, which sets out certain tests and prerequisites.

Among other things, it states that a court is entitled to refuse to make the order, or may impose conditions on the discharge, in any situation where a bankrupt person like the husband has:

• omitted to keep the usual books of account for his business,

• failed to satisfactorily account for loss or deficiency of assets, or

• embarked on a legal defence or started action that was “frivolous or vexatious” vis-à-vis his creditors (which in this case included the wife).

Here, there was ample evidence that the husband had been hiding income. Right before declaring bankruptcy, he apparently gave away the business for free. Also, his lack of co-operation and financial disclosure had forced the wife to take certain legal steps and to incur significant and unnecessary legal costs including the hiring of the forensic auditor. The husband had also never paid the $25,000 costs order that had been imposed on him earlier.

In these circumstances the court decided to grant the bankruptcy discharge – but to postpone it for a month and impose terms. After pointing out that the husband would have an easier time satisfying his hefty support arrears without a bankruptcy trustee in the way – and after taking pains to clarify that such a discharge would have no effect on the wife’s support entitlement (since by law a discharge does not release a person from child/spousal support or maintenance obligation arising under a court order), the court ordered him to pay $25,000 to the trustee immediately. This was intended to pay off part of the outstanding arrears; it was not to be applied to going-forward support that he would continue to be liable for.

For the full text of the decision, see:

Re Savoia, 2013 ONSC 6127 (CanLII)   http://canlii.ca/t/g0tql

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at www.RussellAlexander.com.