What to Do if Your Ex-Spouse Declares Bankruptcy to Avoid Paying You

It is a nightmare scenario for many separated Canadians: after months of difficult negotiations and finally reaching a property settlement, your ex-spouse declares bankruptcy. Often, this is perceived as a strategic move to wipe out an equalization payment or avoid dividing family assets. Understanding how federal insolvency laws interact with provincial family laws is essential to protecting the money you are rightfully owed.

Under Canadian law, all debts are not treated equally. The Bankruptcy and Insolvency Act (BIA) specifically carves out protections for family support. 👶 However, the lump-sum payments meant to equalize the division of matrimonial property are treated exactly like a credit card debt or a personal loan. If you live in Ontario, Alberta, or British Columbia, the strategy to protect your settlement involves participating actively in your ex-spouse’s bankruptcy proceedings.

Step-by-Step Process for Creditor Spouses in Canada

If you receive a Notice of Bankruptcy regarding your former partner, you must act quickly. Missing deadlines can result in the forfeiture of your right to claim equalization funds. Whether you are dealing with the Court of King’s Bench in Manitoba or the Superior Court of Justice in Ontario, the general procedure remains consistent under federal law.

Step 1: Understand What Debts Are Protected

First, review the nature of the debt your ex-spouse owes you. Section 178 of the BIA clearly states that bankruptcies do not release a debtor from any award of damages by a court regarding spousal support, child support, or alimony. Arrears for these types of support survive the bankruptcy entirely. However, if the debt is an equalization payment for property division, it is dischargeable.

Step 2: File a Proof of Claim with the LIT

Upon receiving the bankruptcy notice, you will be provided with a Proof of Claim form. You must fill out this form, attach a copy of your separation agreement or court order, and submit it to your ex-spouse’s Licensed Insolvency Trustee (LIT). 📝 This formally registers you as a creditor and gives you the right to vote at creditor meetings and receive any potential dividends from the sale of their assets.

Step 3: Attend the Meeting of Creditors

In many bankruptcy cases, a Meeting of Creditors is called. You or your lawyer should attend this meeting to ask questions about your ex-spouse’s assets. If you suspect they have engaged in fraudulent conveyances-such as transferring a vehicle or real estate to a new partner or family member for $1 just before filing-this is the time to raise the issue with the LIT.

Step 4: File an Objection to the Discharge

If you believe the bankruptcy was filed maliciously, you have the right to oppose their discharge. Under the BIA, you can file a Notice of Opposition. While this process cannot change your equalization payment into a non-dischargeable debt, a successful opposition can result in the court refusing or suspending the discharge, or issuing a conditional discharge requiring the bankrupt to pay a sum of money. Crucially, as established in Schreyer v. Schreyer, any conditional payments must be made to the Licensed Insolvency Trustee for pro rata distribution to all unsecured creditors, rather than paid directly to you.

How Much Does it Cost in Canada?

Fighting an ex-spouse’s bankruptcy can be an expensive legal undertaking, and you must weigh the costs against the potential recovery.

• Filing a Proof of Claim: This is a free administrative step and can usually be done without a lawyer.
• Lawyer Fees for Opposing Discharge: Hiring a law firm to formally oppose a bankruptcy discharge in court will typically cost between $3,500 and $10,000 CAD, depending on the complexity of the trial.
• Court Filing Fees: Filing a Notice of Opposition as a creditor costs exactly $50 CAD under the BIA General Rules.
• Asset Tracing: If you need to hire a forensic accountant to prove they hid assets, expect to pay an additional $2,000 to $5,000 CAD.

How Long Does the Process Take?

A standard first-time bankruptcy in Canada lasts 9 to 21 months, depending on the bankrupt individual’s surplus income. 📅 However, if you file an opposition to their discharge, this timeline is paused until the bankruptcy court hears the matter. Due to court scheduling, an opposition hearing can delay the conclusion of the bankruptcy by an additional 6 to 12 months.

Dischargeable vs Non-Dischargeable Family Debts

Frequently Asked Questions (FAQ)

Author: lawyerinfo.ca