The following is a brief primer on the interplay between the federal Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) and issues that arise in family law cases. 

Effect of Bankruptcy on Division of Family Property/Debt
The most important consideration for family law lawyers with respect to bankruptcy comes down to the timing of that bankruptcy.

Bankruptcy prior to separation: the non-bankrupt spouse will not get an interest in the bankrupt spouse’s property (which is held by the trustee in bankruptcy), unless the bankrupt has already been absolutely discharged by the bankruptcy at the time of separation.

Any agreement transferring assets after bankruptcy would be ineffective as they are no longer the assets of the bankrupt following bankruptcy.

Bankruptcy post separation/prior to division of property: the bankrupt spouse’s one-half interest in family property vests in the trustee (whether or not in the bankrupt’s name) and only the bankrupt’s debts are discharged. There is some argument that the non-bankrupt spouse could claim that the bankrupt’s share of the debt in the non-bankrupt spouse’s name is a basis for a claim provable under s. 121 of the BIA. 

Bankruptcy post separation/after division of property: Generally, an Order or Agreement in place prior to bankruptcy will bind the trustee. In order for it to be binding, the Order or Agreement must actually transfer the interest in assets. Otherwise if the Order or Agreement set out a monetary debt in compensation for division of property, rather than an interest in property, then the non-bankrupt spouse simply becomes an unsecured judgment creditor. 

Case law on the effect of bankruptcy on division of property and debt is limited, but those cases that exist are helpful. In Toth v. Lehman, 2016 BCCA 514 (B.C.C.A.), the bankrupt and her spouse, while married, had jointly obtained a line of credit. Prior to leaving the relationship, the bankrupt removed a large sum from the line of credit for her own use. Pursuant to BIA s. 178(1)(d), the trial judge found that the bankrupt misappropriated the funds she withdrew and as such, the debt owing to the non-bankrupt spouse would survive the discharge. An appeal was dismissed. The Court of Appeal (“the Court”) noted that s. 178(1) contains exceptions designed to ensure that certain wrongdoers cannot take unjustified advantage of the bankruptcy regime’s protection. 

Effect of Bankruptcy on Support
As reviewed in greater detail in D.(S.L.) v. G.(S.A.), 2015 BCPC 370 (B.C.P.C.), the BIA:

• allows a payee to make a claim as a preferred creditor in order to share in a distribution of assets, in addition to maintaining their claim for the balance of support and on-going support (s. 121(4)).
• expressly provides that the bankrupt does not get released from any liability for support under an Order or Agreement (s.178). 

In D.(S.L.) v. G.(S.A.), the parties had entered into a separation agreement addressing support, which the Court found was unaffected by the father’s bankruptcy. However, the Court noted that if the parties’ separation agreement had included provisions for an equalization payment, this could have ended in a different result. The Court also found that the bankruptcy did not amount to a material change in circumstances, as it was largely a result of poor decisions by the father, and the wife and children should not have to bear the burden of those decisions. The Court did note that there are circumstances where a bankruptcy could increase the income available to pay support whereby meeting the material change test, but this was not such a case.