Guest post by Sonia Kainth, family law lawyer,
Henderson Heinrichs LLP (Vancouver)*
Getting divorced typically causes significant financial disruption for both parties. If you are relying on support payments from your Ex to survive and your Ex gets into financial difficulties this will clearly have a negative impact on your situation, especially if you have children living with you.
This post reviews how the law applies to support payments in the context of a consumer proposal or bankruptcy and provides some suggested best practices to protect your own financial position.
Note: this post is for information purposes only and cannot be relied upon as legal advice nor is it intended to provide same.
A Typical Scenario
You and your spouse are separated and your spouse is paying you spousal support and child support but your spouse informs you that he or she is filing a consumer proposal or filing for bankruptcy. What does this mean for you? If your spouse’s obligation is as a result of a separation agreement or a Court Order pursuant to the Family Law Act, RSBC 2013, ch. 11 or Divorce Act (Canada), RSC 1985, c. 3 (2nd Supp), then it is likely that your situation will be covered under sections 121 and 178 of the Bankruptcy and Insolvency Act, RSC, 1985, c.B-3 (the “BIA”)
Timing is Key to Avoid a Claim of Fraudulent Preference and Gain Preferred Creditor Status
The key point is that the obligation to pay support, whether spousal or child, must be in place before the payor spouse files a consumer report or for an assignment in bankruptcy. People need to be careful in this regard because any agreement made on the “eve” of bankruptcy can be challenged by the Trustee or other creditors as a fraudulent preference. This means that the agreement was only reached in order to place the recipient spouse ahead of other creditors which is not allowed.
The benefit of having a provable claim with respect to spousal and/or child support, is that the recipient spouse then becomes a “preferred creditor” pursuant to s.136(1)(d.1) of the BIA. That section states that priority is given to:
Claims in respect of debts or liabilities referred to in paragraph 178(1)(b) or (c), if provable by virtue of subsection 121(4), for periodic amounts accrued in the year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable.
For example, monthly child support payments would fall into the category of periodic amounts. If you have preferred creditor status that means you would be more likely to be paid out any child support you are owed from the year before your Ex filed for bankruptcy. We say “likely” because there may be other preferred creditors or there may not be enough money to cover the obligation.
The Type of Support, Periodic vs Lump Sum Payment, Affects the Amount of Support You May Claim as a Preferred Creditor
The important thing to remember is that if the support payments are periodic, then the preferred claim only applies to the amount of support accrued in the year before the date of the bankruptcy. If the support payable is by way of lump sum, then there is no time restriction as in the periodic payment scenario for it to have priority status.
Best Practices to Protect Your Support Payments
As a recipient of child and/or spousal support the best thing to do to secure your payments is:
- talk to a lawyer who is experienced in this area;
- secure a written agreement as soon as possible;
- if you have any doubt as to the timing of the bankruptcy or report, get a Court Order to secure your support;
- remember that a discharge of bankruptcy does not extinguish the bankrupt’s obligation to pay support (s. 178(1)(b) and (c) of the BIA).
Information for this blog post was prepared using “Some Bankruptcy Law Issues Affecting Division of Assets and Support Under the Family Law Act”, prepared by Gordon Plottel, Partner at Miller Thompson LLP, Vancouver, BC, April 24, 2014. This article can be found online here.
- 121(1) which defines provable claims as “all debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act”;
- 121(4) which states that “a claim in respect of a debt or liability referred to in paragraph 178(1)(b) or (c) payable under an order or agreement made before the date of the initial bankruptcy event in respect of the bankrupt and at a time when the spouse, former spouse, former common-law partner or child was living apart from the bankrupt, whether the order or agreement provides for periodic amounts or lump sum amounts, is a claim provable under this Act”; and
- 178(1)(b) and/or (c) which defines that a discharge of bankruptcy does not release the bankrupt from obligation in relation to alimony or debt or liability arising under a judicial decision establishing support or under an agreement for support for a person and/or children who reside apart from the bankrupt.
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