The Effects of Insolvency on Spousal Support

Jan 24, 2018
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Bankruptcy & Spousal Support

Divorce is more than the legal separation of two people and the dissolution of the bonds of marriage. In most cases, divorce proceedings also encompass the complex and contentious issues of financial and property settlements, and support or alimony payments. The division of assets and the calculation of spousal support may often result in financial setbacks for one party over the other.

Following a divorce, debts can burden one or both former spouses. The remnants of the marriage and its itinerant acquisitions — a family home, autos, and furnishings — combined with a reduced household income sometimes create financial hardships. In addition, spousal support or alimony payments may add to one party’s obligations.

While bankruptcy is sometimes a viable option for a fresh financial beginning following a divorce, there are pitfalls that accompany insolvency proceedings, especially for those ex-spouses trying to reduce or avoid a support payment.

Balancing Federal and Provincial Laws

Divorce is a division of family law that, according to Canada’s federal constitution, falls within the purview of the provincial and territorial governments. Because each province and territory has differing laws vis-à-vis divorce and property distribution, dividing assets often leads to complex and expensive proceedings based on the governing jurisdiction’s laws and precedent cases.

Conversely, the federal Divorce Act mandates matters of support and alimony, while the federal Bankruptcy and Insolvency Act (BIA) governs bankruptcy proceedings. Provincial and territorial governments may also enact additional bankruptcy provisions that comport with the federal statutes.
Reconciling the differences between the many federal and provincial laws can sometimes lead to procedural questions for courts as they weigh competing legal principles.

Dividing Property and Determining Support

Following the breakdown of a marriage, former spouses may find themselves in a difficult position of inequity when allocating the family assets. Provincial and territorial courts and governments have attempted to address the resulting imbalances by employing one of two legal schemes: equalization or division of property.

In either case of calculating equalization or division, courts look to the parties’ assets, debts, and shared property, and finances to determine an equitable settlement according to governing law. Since each province enacts its own version of the family law, there is no national standard for distribution of assets.

However, under the federal Divorce Act, spousal support is uniform across Canada. When determining the appropriate amount of spousal support, judges weigh a variety of factors beyond property, including among others:

• the length of the marriage and the financial means and needs of both parties
• whether one or both spouses worked and how each contributed to the marriage
• the care of any children
• a spouse’s ability to be self-sufficient
• any prior agreements or arrangements made between the parties

The courts will also consider whether spousal support payments are warranted where one spouse sacrificed earning potential during the marriage (i.e. leaving a career to raise children) and the effect and costs of on-going child care.

Bankruptcy as a Solution to Excess Obligations

It is common for former spouses to experience financial difficulty following a divorce. Like the marriage itself and any legal proceeding, divorce comes with a price tag that can have a negative impact on earnings, taxes, debts, and personal finances.

Pursuant to the federal Bankruptcy and Insolvency Act, R.S.C. 1985, spousal support is not subject to discharge. As with most legal issues, however, there are loopholes.

For example, in 2011 the Supreme Court of Canada determined that there are instances where support may be a provable claim for the purposes of bankruptcy. In the matter of Schreyer v. Schreyer, the Court’s decision suggested a need for revisions and clarification to existing laws and demonstrated further how federal and provincial laws may sometimes counteract each other.

Bankruptcy: A Solution to Ease Financial Burdens

Spousal support, alimony, and child support can become obligations that an ex-spouse may find both onerous and un-fair. However, bankruptcy is not an end-all solution.

When spousal support payments are impossible to meet because of other debts and obligations, bankruptcy may be a viable alternative, but not to eliminate support. Rather than sinking deeper in debt or violating a support order, bankruptcy can help restructure debt and payments by allowing a debtor spouse to free resources to apply to support instead.

Before filing for bankruptcy thinking it will cancel alimony or court-ordered support, it is always a good idea to talk to a lawyer who knows the federal and provincial laws. In the end, meeting a support obligation can be less costly than unnecessary and expensive court proceedings that may ultimately be a futile endeavor.