How are Debts Treated Under the Family Law Act?

Under s. 86 of the Family Law Act, debts existing at the date of separation are considered "family debt" and are to be divided between the spouses. All debts that were incurred by one spouse after the date of separation are not considered "family debt" and are not to be divided between the spouses unless the debt was incurred for the purpose of maintaining "family property".

S. 87 of the Family Law Act provides that the default valuation date is at the date of hearing.  

How does a court treat a debt with a fluctuating value? 

This is an important question that was considered in the case of K.M.J. v. J.H.D.N., 2014 BCSC 1895 (CanLII). The preferred approach is as follows:

first, the court may use s. 87 of the Family Law Act in order to fix the valuation date at a date other than the date of hearing (which will often be the date of separation); and second, the court may use s. 95 of the Family Law Act to order unequal division of family property and debt, if applicable.

The court used the example of a line of credit to illustrate at para 156: 

[156]     Some examples may be useful. I will use a line of credit as the family debt throughout, for consistency. In these examples, I will assume that the starting debt meets the definition of family debt at the date of separation.

• If the principle debt remained static post-separation but interest accumulated, then the value should be the new balance including accumulated interest at the date of hearing.
• If the amount of the debt was identical at hearing date and separation date but one party had used the line of credit during the period, such that the amount of debt had been much higher and/or much lower between those dates, the value would still be the balance at hearing plus some interest adjustment. The interest would have to be adjusted using s. 95, taking into account the balance at separation and whether the use post-separation resulted in greater interest accumulation than would have otherwise occurred, and whether those charges or other charges have increased the debt “beyond market trends”.
• If the debt was paid off entirely by one spouse post-separation but pre‑hearing leaving nothing to divide at the hearing date, s. 87 allowing the court to set a different valuation date should be used or, perhaps, s. 95 would be used to correct what may be a significant unfairness through division of other property or debts. I would use s. 87. Interest accumulated to the date the debt was retired would need to be considered. The same process would be applied if the debt had been paid down but not retired entirely.
• If the debt had been run up well above the separation date level, so that the value was significantly different at hearing, this significant unfairness could again be addressed through the application of ss. 87 or 95. The peculiar circumstances of each case may drive the selection of which section to use and the date to be selected.

This case also clarified that the "date of hearing" is not limited to the tendering of the evidence, but instead includes up until the date that submission and argument of the parties were made (at para 149).