Primer on Bankruptcy in Family Law Cases

The action of one spouse becoming a bankrupt while in a family law case may effect the division of property between the spouses.

Generally, support obligations are not affected by the bankruptcy.

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1. Determine which legislation is applicable.

Was the action commenced under the Family Relations Act or the Family Law Act? If commenced under the Family Relations Act, then one must assess the date of the "triggering event". If commenced under the Family Law Act or if the parties agree that the Family Law Act applies, then the "triggering date" will be the date of separation.

See para 19 of Howland Estate v. Sikora, 2015 BCSC 2248 (CanLII)

which provides: 

[19]        Under the FLA, however, there is no requirement for a triggering event. Section 81 stipulates that a former common-law spouse has a right to an undivided half interest in all property as a tenant in common upon separation. Separation is the event which crystalizes the entitlement. Such is the case here.

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2. Determine the order in time between "triggering event" and assignment or petition into bankruptcy.

The "triggering event" presumptively creates an undivided 1/2 interest in both spouses. Upon bankruptcy, the bankrupt spouse's 1/2 interest will vest into the trustee (i.e., effectively the property now belongs to the trustee in bankruptcy.) The practical effect is that claims to "reapportion" the bankrupt's spouse will likely fail.

If, however, there is no "triggering event", then the property has not vested to the trustee and the property may still be reapportioned between the spouses as the family property is conceptually still held between the parties in joint tenancy.

Paragraphs 28 to 48 of M.R.P. v. S.R.P., 2014 BCSC 1249 (CanLII)

are helpful: 

[41]        British Columbia is not an equalization province. It is a division of property province which gives a former spouse a proprietary interest in the family assets. On the triggering event on August 15, 2011 each party had an undivided half interest in each family asset as a tenant in common, pursuant to s. 56(1) and (2) of the FRA. On the same date, the husband – now the bankrupt – was made subject to a restraining order prohibiting him from dealing with the family assets, except for day to day expenses. Pursuant to s. 56(3) of the FRA, the undivided half interest is a proprietary interest that could be increased by a reapportionment in favour of one spouse over the other, if an equal division of property was unfair.

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3. Determine whether there was any order preventing the vesting of the property to the trustee in bankruptcy.

Even if the family property would have validly vested to the trustee in bankruptcy, if there was an order prior to the vesting that prevented the vesting (such as a financial restraining order), then the property may not have legally vested to the trustee.

The following paragraphs from the Bankruptcy of Michael John Beninger, 2003 BCSC 1790 (CanLII)

are helpful:

[13]   The decisions and statutory provisions dealing with the question of whether the Court can order reapportionment of the family assets of a spouse after that spouse has become a bankrupt establish the following propositions:

(a)         at the time of a triggering event, an undivided one-half interest in the family assets as tenants-in-common vests in the name of each spouse (s. 56(1) of the F.R.A.);

(b)         the undivided one-half interest to which the bankrupt is entitled vests in the trustee in bankruptcy on the happening of a bankruptcy (s. 71(2) ofthe B.I.A.);

(c)         there is no subsequent ability for the Court in the F.R.A proceedings to reapportion the one-half interest which vested in the name of the Trustee unless it could be said that there was a Court Order in effect prior to the bankruptcy restraining the spouse that ultimately became a bankrupt from disposing of or in any way dealing with the family assets.

[23]   Accordingly, unless I can find that there was a restraining order in place, I am bound to decide that what vested in the Trustee was the interest of Mr. Beninger in his R.R.S.P.’s at the date of the bankruptcy and that this interest was only subject to the possibility of a 50% interest of Ms. Beninger in that asset.

[32]   Without deciding the question of whether an informal “restraining order” between the parties would allow me to conclude that the R.R.S.P. interest of Mr. Beningervested in his Trustee subject to the ability of the Court to reapportion that interest in favour of Ms. Beninger, I am satisfied that I can not conclude that there was such an informal restraining order in place.  Accordingly, I find that the interest in the R.R.S.P. of Mr. Beninger which vested in the Trustee on June 4, 2001 was subject only to an undivided one-half interest in favour of Ms. Beninger.  Ms. Beninger is therefore entitled to one-half of the balance in the R.R.S.P.’s of Mr. Beninger at June 4, 2001.

Of note, the court in that case, reapportioned the RRSP in the non-bankrupt spouses's name entirely to her.

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4. Consider the issue of reapportionment of the non-bankrupt spouse's property and debt.

It appears that the circumstances of the bankruptcy will be relevant to the property and debt left in the non-bankrupt spouse's name. It would likely be the case that the non-bankrupt spouse is facing similar financial circumstances following the separation and may be facing bankruptcy or a consumer proposal.

If the evidence shows that the debt burden left in the non-bankrupt spouse's name was on account of otherwise family debts, then the court may find it fair to split the existing debt burden between both spouses.

For an example, see S.M.K. v. R.K., 2014 BCSC 2216: 

[40]        In this case, I am satisfied that the Consumer Proposal debt was incurred for a family purpose. It was primarily the consequence of the respondent’s income tax debt to the CRA incurred during the marriage. Therefore the Consumer Proposal can be taken into account under s. 65(1)(f) of the Act for the purposes of reapportionment.

[41]        The respondent’s position is that the Consumer Proposal should be split on a 50/50 basis. The theme of his evidence is that he was responsible for paying the majority of the family’s monthly living expenses, including rent, utilities and most of the food. The claimant, he says, spent little of her earnings on family living expenses but rather on herself. He suggests she was frivolous with her purchases. The end result was that the couple spend beyond their means.

[42]        The claimant challenges this assertion. Her position is that the respondent was the majority income earner and he therefore paid the majority of the household living expenses. Her earnings were used for family purposes also, including clothing for the girls. She blames the couple’s predicament on the respondent’s financial mismanagement.

[43]        In my judgement, there is merit to both arguments. However, both must assume responsibility for what happened. It is clear to me that the circumstances the parties find themselves in is due in large part to their failure to communicate during the marriage, particularly on financial matters.

[44]        The balance of the Consumer Proposal on the Separation Date was $52,000. The respondent concedes that on the Separation Date the claimant had a personal debt of approximately $3,300 and agrees that it too is a family debt that must be taken into account.

[45]        The total family debt on the Separation Date was therefore $55,300 (“Family Debt”). Each, then, is prima facieresponsible for $27,650. The claimant has assumed her debt of $3,300 and the respondent has taken on the burden of the Consumer Proposal of $52,000. In order equalize the debt and achieve fairness between them, subject to allocation of the Racing Miniature inventory, the claimant must therefore pay the respondent $24,350.

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5. Determine whether the bankruptcy may be annulled.

In the rare circumstance, if it is the non-bankrupt spouse's view that their interests in family property were prejudiced by the bankruptcy, then it may be possible to have the bankruptcy annulled therefore re-vesting family property in the bankrupt spouse.

See Stasiuk v. Stasiuk, 1999 CanLII 6100 (BCSC): 

[23] Counsel for Mr. Stasiuk urges the Court to respect the bankruptcy proceedings and permit Mr. Stasiuk to resolve his financial affairs through the bankruptcy.  Mr. Gagnon argues that issues surrounding the division of property should be decided on the bankruptcy playing field with the other creditors represented.  In that respect, Mr. Gagnon argues that the outcome of an annulment would be essentially unjust because it means the division of matrimonial property will be made without reference to the other creditors of one of the parties.  I note, however, that the potential prejudice to Helen Stasiuk and the children arises by reason of the bankruptcy and in a manner which could well have been avoided had Mr. Stasiuk abided by the order of Master Bishop and sought the consent of the Court to make his assignment in bankruptcy.  He chose not to.  He did so while at the same time he was in breach of other orders of the Court.