How Does an Unpaid Equalization Payment Intersect with Bankruptcy?
If one separated or divorced spouse is obliged, by agreement or court order, to pay the other spouse an equalization payment, there are various enforcement mechanisms that can be brought into play if he or she does not do so.
But what happens if the payor spouse goes bankrupt in the interim?
This question was addressed squarely by the Supreme Court of Canada in a case called Schreyer v. Schreyer. In particular, the Court considered the interplay between provincial Family Law statutory schemes on one hand and the federal bankruptcy laws on the other.
Perhaps surprisingly, the Supreme Court concluded that any unpaid equalization payment is “swept into the bankruptcy” of the now-bankrupt spouse that has the payment obligation.
Effectively, this means the equalization claim by the recipient spouse is just like any other debt owed by the bankrupt spouse: In keeping with the regime established under the federal Bankruptcy and Insolvency Act, it becomes a claim that has to be proven just like any other claim put forth by a creditor (hopefully) for payment out of the bankrupt’s assets.
More to the point, in the context of the bankrupt spouse’s bankruptcy proceedings, it cannot be put forward as a “preferred” claim, ranking ahead of other existing creditors. Rather, it may be one of many simultaneous debts owed by the bankrupt spouse and will rank behind any secured creditors in priority.
(This certainly does not mean that a recipient spouse will not receive his or her equalization payment, or that the bankrupt spouse can try to avoid having to pay it under the guise of a bankruptcy. It just means that equalization claims don’t attract any preferential status in the paying spouse’s bankruptcy proceedings).
And – no doubt to the chagrin of a spouse who is owed and expecting an equalization payment – the bankrupt spouse is released from that claim once his or her bankruptcy has been discharged in the usual manner.
Note that this outcome pertains to unpaid equalization payments only, which readers will know is the amount that spouses must pay to each other in order to equalize their respective Net Family Property as part of their division of assets.
However, in what may be a puzzling distinction, under Canadian family law, the situation is entirely different for unpaid support claims and unpaid arrears in support: the bankrupt spouse is not released on discharge; rather, the payment obligation persists beyond the bankruptcy and is not erased.
I will touch upon the ramifications of this second scenario in a future blog.
For the full text of the cited decision, see:
Schreyer v. Schreyer, 2011 SCC 35,  2 S.C.R. 605 (S.C.C.)
Thibodeau v. Thibodeau, 2011 ONCA 110, 104 O.R. (3d) 161 (Ont. C.A.)