How Will My Family Law Proceedings Affect A Bankruptcy

2014-07-15   minute read

In family law matters there are three types of proceedings that may affect a bankruptcy: child custody, support obligations and equalization issues.

Child Custody
First, child custody issues have an indirect effect on a bankrupt. During a bankruptcy, a bankrupt may be required to pay surplus income into their bankruptcy estate based on his or her family income. How much the bankrupt will be required to pay is determined by a directive issued by the Office of the Superintendent of Bankruptcy. The level ultimately varies depending on the number of individuals in the family unit. The larger the family unit, the higher the threshold is before one is required to make a surplus income payment.

To give you an example, in 2014, a family of two will be required to make surplus income payments when the total net monthly family income reaches $2,708, while a family of three will be required to make surplus income payments when the total net monthly family income reaches $3,283. As a result, if a bankrupt parent is given custody of a child, then the level of income required before surplus income payments are to be paid will increase.

Outstanding Support Obligations

Outstanding support obligations are a unique type of debt. If outstanding support payments are provable in a bankruptcy, a portion of the debt will fall under section 136 of the Bankruptcy and Insolvency Act and the remainder of the debt will fall under section 178. For a debt to be classified as support obligations, the obligation must be:

1) the result of a judicial decision or an agreement in effect prior to the date of bankruptcy;

2) for maintenance and support of a former spouse, common law spouse or child;

3) living apart from the bankrupt.

Section 136 (1)(d.1) limits the preferred claim to periodic amounts accrued in the year before the date of bankruptcy plus any lump sum amount that is payable. A debt that falls under section 136 will be paid from funds available to creditors in the bankruptcy estate, if any, prior to any distributions to unsecured creditors.

 The portion of support payments that are not paid under section 136 will fall under section 178 and will survive the bankruptcy. Therefore, the bankrupt will be required to pay the amounts outstanding, notwithstanding the bankruptcy.

Any support payments the bankrupt pays during the bankruptcy is deducted from the bankrupt’s income when calculating surplus income. If the bankrupt is the recipient of the support payments, then the support payments will be included in calculating their surplus income.

Finally, when it comes to costs awarded by a court it is important that the portion attributable to support be determined and explicitly stated in the award. The portion that is attributable to support is treated as noted above.

Equalization Issues

An equalization claim is a provable claim in the event the date of separation is prior to the date of bankruptcy. Equalization claims are considered an ordinary unsecured creditor. An equalization claim in favour of the bankrupt is an estate asset for which a trustee will realize on. The bankrupt will lose their right to the claim as it becomes an asset of the bankruptcy estate.

Navigating the challenges of your debt while going through a family law issue can be stressful and confusing. Contact an MNP debt specialist today to understand your responsibilities. 

Consultation icon