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August 12, 2011

Bankruptcy and Divorce

In Schreyer v Schreyer a Manitoba couple filed for divorce. The ex-wife was to receive equalization payments, a system where the net worth of each spouse is calculated and the spouse who has more assets pays the other spouse.

However, the ex-husband declared bankruptcy which meant that the ex-wife’s equalization payments were deemed to be worth nothing. The husband was allowed to keep the family farm because this asset was safe from bankruptcy. This result was challenged and upheld at the Manitoba Court of Queen’s Bench.

This case made its way to the Supreme Court of Canada (SCC).  On July 14, 2011, the SCC made the unanimous decision that when a person declares bankruptcy, equalization payments are considered debts and are therefore cleared.

This is a loop-hole that the Court is suggesting Parliament close due to the fact that it places family law and bankruptcy law in contention rather than allowing them to be more compatible.

While this case took place in Manitoba the same thing could happen in New Brunswick if a spouse’s claim to property is made as a claim for money or if a spouse’s claim is of a lower priority than another creditor. In a bankruptcy case, it would be possible for a spouse to make a claim for property in the bankruptcy proceedings. However, this did not happen in the Schreyer case because the ex-wife was unaware of the bankruptcy.

The best way for individuals involved in the division of marital property to avoid this type of result is to consult a family law lawyer about the various options for protecting themselves. This might include, for example, receiving the equalization payment at the same time the agreement is signed or requiring that the asset be sold to produce the cash that is due to the spouse. As well, if the asset is the family home, neither spouse should sign the deed over to the other until payment is made. If the asset is not the family home then a security should be registered to protect future payment.

Make sure you take steps to protect yourself so that this does not happen to you.