Bankruptcy Frees Spouse From Equalization Payments

Be free from divorce settlement costs by declaring yourself in bankruptcy. Read about the factors that might grant you this possibility, and get informed about equalization, how it works and how it could affect you.

By April Lopez
Updated: April 01, 2015
Bankruptcy and Divorce

In Canada, spouses could now possibly be free from paying divorce settlements with a strategic claim of bankruptcy as the Supreme Court of Canada left a legal loophole open.

And the Parliament has to take action.

The court has justified equalization payments as debts which mean the money owed will be totally erased from a person's record on a declaration of bankruptcy. This also means that an ex-spouse who owed such money will no longer receive it.

Equalization is a method of combining a couple's assets, determining its net worth by placing a value on their assets and ultimately, the spouse who has more will pay off the one who has less.

In Canada, not every province uses this method.

In 1999, the case of Schreyer vs Schreyer involved a Manitoba couple who separated. In 2007 the evaluation of their assets was completed and the court declared that she was owed $41,063.48 on the premise of the family farm's value.

However in 2002, the husband declared bankruptcy.

A person declared bankrupt could still be worth something because some assets such as family farms and pensions are protected in bankruptcy.

According to the ex-wife, she didn't use any available legal avenues because she didn't know her ex-husband filed for bankruptcy. And because of this, her stake wasn't protected.

As a result, the ex-husband got the farm. In addition, the lower courts deemed her equalization payment to be worth nothing.

Justice Louis LeBel said, the Bankruptcy and Insolvency Act could be reformed in respect of the bankruptcy's discharge result on equalization claims and exempt assets. The court says, equalization payments are considered debts and that is very clear as they are monetary in nature.

But bankruptcy law doesn't let people avoid payments such as child support and alimony.

Lebel adds, a claim under an equalization of property scheme can't be considered to establish support although it is of equal importance.

But the lawyers for the Manitoba woman argued it should be.

In their submission to the court, they wrote that support and equalization orders are directed at stopping the role that divorce plays in the feminization of poverty.

Lebel said that in the decision, a 2003 Senate committee examined the issue and suggested that the act be amended. He believes that now is time for the issue to be heard to make sure that the principles of bankruptcy and family law are compatible.

One of the lawyers for Manitoba woman, Alain Hogue said the ruling was disappointing but welcomed the call for change.

But according to the lawyer of the Manitoba man, there is a good reason to exempt assets like farm properties.

Gerald Ashcroft said, the Bankruptcy and Insolvency Act permits an honest but unfortunate debtor to obtain a discharge so that he or she is able to reintegrate into the business life of the country and that's what happened in the Manitoba case.

Another family lawyer remarked, this actually provides support to individuals who are in a similar situation.

According to lawyer Andrew Feldstein, the ruling implies that lower courts could take deals dissolved by bankruptcy into account in settling upon spousal support.

Feldstein added, lawyers can raise this reasonable course of action with their clients. Initially Feldstein was disappointed because the issue was pretty clear. But ultimately the ruling sent a message to Parliament that there is a dire need to solve the problem.

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July 22, 2011

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