INTRODUCTION
Canadian insolvency law intersects with family law when one or both spouses are bankrupt during a divorce proceeding. In orders for equalization payments, entitled spouses are not prioritized over creditors but are treated as unsecured creditors of the payor spouse. This outcome contributes to the feminization of poverty, a social phenomenon triggered by various socio-economic factors and systematic injustices, which have detrimental effects on women.[1] In this paper, I show that legislative reform is necessary to ease the impact of the treatment of divorcing spouses as unsecured creditors in a bankruptcy. I first provide an overview of the bankruptcy and family legislation, with a discussion of the seminal case law. I then discuss the feminization of poverty, and conclude with suggestions for legislative changes.
LEGISLATIVE CONFLICTS
In a divorce, an individual’s rights under the Ontario Family Law Act (the “FLA”) often conflict with their rights under the federal Bankruptcy and Insolvency Act (the “BIA”).[2] This is because courts must simultaneously protect the rights of spouses and intervening third-party creditors. [3]
An essential characteristic of the bankruptcy regime is the collection and sale of a bankrupt’s non-exempt assets, and the proceeds of distribution among creditors.[4] Section 136 of the BIA outlines the distribution scheme; secured creditors are given a priority over preferred creditors, who are prioritized over non-secured creditors, who receive a pari passu distribution of the bankrupt’s assets.[5] Family law is based on its own public policy principles, which includes the equitable distribution of family assets.[6] Under Part I of the FLA, marriage is presumed to be an economic partnership.[7] This presumptively entitles separating parties to an equal division of property acquired during the marriage, which requires calculating each spouse’s Net Family Property (“NFP”) to determine the equalization payment.[8] In a bankruptcy, section 71 of the BIA results in the property[9] of the bankrupt spouse becoming property of the bankrupt’s estate.[10] Therefore, the non-bankrupt spouse cannot obtain an interest in these assets.[11]
Thus, in a bankruptcy, the difference in the spouses’ NFP creates a creditor-debtor relationship between the parties.[12] A declaration of bankruptcy does not erase one’s obligation to submit an equalization payment to an entitled spouse, but prioritizes the debts owed to secured creditors.[13] While spousal support obligations are privileged in bankruptcy, equalization payments are not.[14] The courts rarely increase the duration and amount of spousal support payments to compensate for this inequity.[15]
A bankruptcy’s timing is crucial.[16] Issues pertaining to the treatment of entitled spouses do not arise if the payor spouse is discharged from bankruptcy before the date of separation.[17] Once an equalization payment constitutes a provable claim under section 121(1) of the BIA and a bankruptcy occurs, the equalization payment will be stayed in bankruptcy.[18] If a spouse assigns into bankruptcy after the separation date but before the enforcement of the equalization payment, the recipient spouse must seek leave of the court to pursue claims for assets that do not vest in the trustee.[19]
Legislators intended to protect creditors from fraudulent spouses by preventing insolvent debtors from giving away assets, which prejudices unsecured creditors by reducing the value of property that is subject to distribution.[20] However, for non-bankrupt spouses, the outcome is neither fair nor ideal.
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