Spousal support can be worth a lot of money. Half of the income that a spouse earns can be paid to his or her ex-spouse as spousal support. Since spousal support can be worth so much, it is not uncommon for a separated or divorced spouse to feel that they simply cannot afford to pay spousal support to their ex-spouse. Many separated or divorced spouses find it difficult to make ends meet, especially if they are trying to maintain the lifestyle they had during the marriage, so it can seem natural for an ex-spouse to consider bankruptcy when it seems that his or her support obligations are just too much. Unfortunately, going bankrupt usually only makes things worse.
Going bankrupt can make things much worse for spouse who pays spousal support in two ways:
1. Going bankrupt does not erase spousal support arrears or the obligation to pay spousal support going forward. Even if you are going through a bankruptcy, you still have to pay spousal support and if a spouse does not fulfill his or her spousal support obligation, the arrears continue to accumulate with interest.
2. A judge (or arbitrator) may increase the amount of support that a bankrupt spouse has to pay if the ex-spouse does not get everything to which he or she was entitled in property or other claims because of the bankruptcy.
I will discuss with each of these points in a little more detail.
Spousal support is exempt from the bankruptcy. The fact is that a bankruptcy does not change the amount of spousal support owed, or the amount of spousal support arrears that are owed, and both ongoing spousal support and the last year of arrears get a “priority” in the bankruptcy, meaning that the support recipient gets his or her support before other debts are paid. Even while a spouse is in bankruptcy, he or she must continue to pay the full amount of spousal support and arrears will continue to accumulate, with interest, if the support payer fails to pay the support.
However, since bankruptcy does not erase any part of a spouse’s support obligation, many support recipients do not bother putting a claim in the bankruptcy. Making that claim can be a bit of a hassle, with little upside, because the support payor still has to pay the support whether or not the recipient puts the claim into the bankruptcy or not. However, if the recipient spouse or the Family Responsibility Office does not put a claim into the bankruptcy, that can make things much worse for the paying spouse. If the recipient spouse, or the Family Responsibility Office, does not put a claim into the bankruptcy, then the support owing may not be taken into account when the bankruptcy trustee divides up all the bankrupt’s assets and income between the creditors. That means that all of the bankrupt’s wealth is divided among all of the creditors and none of that wealth is used to decrease the amount of spousal support that the bankrupt owes. Had there been a claim in the bankruptcy for support, the bankruptcy trustee would pay the support owing in priority to the other claims. When there is nothing left, the other creditors would receive nothing, but because at least some of the support had been paid in the bankruptcy, the support or arrears owing would be less, making the bankrupt’s financial situation much better after the bankruptcy.
Bankruptcy can “erase” a spouse’s obligation to make an equalization payment or satisfy other property claims. (For more about property claims on separation click here.) That means that all of the ex-spouse’s financial entitlements, other than support, can be wiped out by the bankruptcy. The law permits that to happen, even when it is very unfair to the non-bankrupt spouse. The Supreme Court of Canada held that this is exactly what the law states. However, Judges are extremely willing to correct any injustice done by a bankruptcy and will bend over backwards to find ways to fix things. One of the ways that the court does this, which is permitted by both the Divorce Act and Family Law Act, is to increase the amount of spousal support that the bankrupt has to pay to compensate the non-bankrupt spouse for the negative economic consequences of the bankruptcy. For example, if the bankruptcy wipes out a $50,000 equalization payment owed by the bankrupt spouse to the non-bankrupt spouse, the judge may increase the amount of spousal support by $50,000 or more to erase the impact of the bankruptcy on the non-bankrupt spouse. That additional support payment survives bankruptcy and may be collected by the Family Responsibility Office. Going bankrupt can therefore increase the amount of spousal support that a bankrupt spouse may have to pay.
If you think bankruptcy may become an issue in your separation or divorce, then you should speak to a family lawyer who is familiar with bankruptcy issues to get as much protection as you can, whether you are the spouse considering bankruptcy or the other spouse. You may also want to get a copy of this easy to understand, $20 book, on the Basics of Ontario Family Law, which covers issues related to support, bankruptcy, and many other Family Law issues. It is designed to help people stay out of unnecessary trouble.
To learn more about our Family Law team and their services visit our Family Law page.
This blog is written by John P. Schuman