Declaring Bankruptcy to Avoid Equalization: Abuse of Process and Annulling Bankruptcy

Date: 06 Mar, 2014| Author: Fred Streiman

When a marriage breaks down, spouses often go to extremes to avoid paying the other side. This is especially true when it comes time to dividing the wealth that the family accumulated during the marriage. This process is commonly referred to as equalization or the equalization payment. What it basically entails is the division of property between spouses. Typically, the most expensive piece of property the family owns is the matrimonial home. In Ontario, the matrimonial home is divided equally during a divorce. This process can be complicated if a spouses declares bankruptcy. A declaration of bankruptcy has the potential to wipe out an equalization payment.

In Warner v Warner[1], a husband tried to use bankruptcy to reduce his equalization payment. Mr. Warner had approximately $23,000 owing to two creditors at the time he declared bankruptcy. In bankruptcy, Mr. Warners assets, chiefly the matrimonial home, would need to be sold off. Additionally, there are trustee fees, counsels fees and a 5% levy imposed on all payments from bankruptcy. This would erode the family’s assets in order to reduce the amount that Mr. Warner would owe his wife in equalization. The court is often suspicious of people who declare bankruptcy after separation. Justice Valle looked at Mr. Warners financial situation and found that he was not insolvent. He had a stake in the matrimonial home valued at approximately $122,000 with RRSP’s and a pension. His assets outweighed his relatively small debts. Therefore, the court declared his bankruptcy an abuse of process designed to block or delay the family law process. The court annulled his bankruptcy and vested Mr. Warners assets in his wife until the family law proceedings were complete.

Declaring bankruptcy in the midst of a divorce has serious implications upon the equalization process. The court has the ability to annul a bankruptcy in extreme circumstances. The court has wide discretion under the Bankruptcy and Insolvency Act[2] when considering an annulment application. It will use this discretion when there is evidence of fraud or abuse of process.

It is important to note that while a valid declaration of bankruptcy can wipe out an equalization payment it will not have an effect on support obligations. Spousal support and child support are calculated completely independently of property equalization calculations. Spousal and child support claims will survive a spouse declaring bankruptcy.

The division of property when a marriage breaks down is a difficult subject that can be affected by a number of different factors. This blog posts is designed to canvas some of the issue involve. For a more complete answer, contact a trained professional. The lawyers at Dale Streiman Law LLP are experts on these matters. They have years of experience handling complex divorce settlements.