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If claiming bankruptcy is a possibility for you and you’re thinking about separating or are going through a separation, it is important to know the effects of claiming bankruptcy on the division of “family property” and “family debt”.

Recently, lawyer Samantha de Wit of Brown Henderson Melbye authored an article on this topic titled “Bankruptcy and Family Law: A Bankruptcy Primer for Family Law Lawyers” in the February issue of the Canadian Bar Association of B.C.’s Bartalk Magazine.

Claiming bankruptcy is governed by the Bankruptcy and Insolvency Act (Canada), and issues can arise with respect to how it works with the Family Law Act (British Columbia).

Generally, when someone declares bankruptcy, the ownership of their property is transferred to a trustee in bankruptcy. It is then the trustee’s job to tally up a list of the bankrupt’s debts and then sell as much of the bankrupt’s property as is needed to satisfy the various creditors who are owed money. The effect of claiming bankruptcy on “family property” and “family debt” is different depending on whether the bankrupt spouse declares bankruptcy before or after the separation.

In family law:

  • If a spouse declares bankruptcy before separation, all of the assets in the name of that spouse transfers to the trustee in bankruptcy. The good thing about this situation is that the assets or debts in the non-bankrupt’s name will not be affected. However, upon separation, the non-bankrupt spouse will have no vested interest in the bankrupt spouse’s transferred assets even if the assets were technically “family property”.
  • If a spouse declares bankruptcy after separation, the bankrupt spouse’s one-half interest in all of the “family property” as at the date of separation, vests in the trustee. This could be property in either spouse’s name.
  • When a spouse declares bankruptcy after a court order or agreement is in place relating to the division of family property and debt, the trustee will generally follow the division that is contained in that order or agreement. However, when there is no court order or agreement, there is nothing requiring a trustee to follow terms that were being negotiated between the parties.
  • When a spouse declares bankruptcy before an agreement is finalized, the agreement is not effective. However, you may wish to seek remedies available through the Court process, like those explained below.
  • If the non-bankrupt spouse is unsure whether or not their spouse is going to be claiming bankruptcy after separation, they should take steps to limit the disposal of assets.
  • It is important to note that a restraining order does not necessarily prevent a spouse from a subsequent assignment into bankruptcy. However, if a spouse assigns into bankruptcy after the court has made an order restraining the spouse from disposing of assets, the assignment into bankruptcy may be a breach of the restraining order.
  • Generally, support claims (such as spousal and child support) will survive the bankrupt’s discharge. What this means is that the responsibility to pay child and spousal support will continue after the bankrupt spouse is no longer legally bankrupt so long as the support obligations satisfy the following requirements:
  • it must have been made before the “date of the initial bankruptcy event”;
  • it must have been made when the spouse, former spouse, or child was living apart from the bankrupt spouse. A support obligation to claim for unpaid support that accrued during the year before the initial bankruptcy event has priority in the distribution over several other classes of payments including unpaid rent and municipal taxes.

It is important to know what steps can be taken to protect the non-bankrupt spouses’ interests in “family property” and how those interests are affected based on the time that the bankrupt spouse makes an assignment into bankruptcy.

Some claiming bankruptcy resources you may find useful: