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2014-03-11 20:57:29

Family Law - Does your partner's bankruptcy affect your claim on marital assets?

Intersection between Family Law and Insolvency Law  - Know your rights - Family Law can crash into Insolvency Law and cause havoc for the non-bankrupt spouse.

 A recent Canadian case illustrates the point.  There can be significant contentious issues throughout a bankruptcy if there is also competing Family Law issues.    For instance, a recent case heard at the Supreme Court of Canada illustrates some of the complications that can occur.

Schreyer vs. Schreyer :  An overview of the case

-          -  Mr. Schreyer declared bankruptcy but did not declare or disclose to the Bankruptcy Trustee that his ex-spouse had a potential claim on his marital home nor informed his ex-spouse or her lawyers that he had declared bankruptcy

-         -   Mr. Schreyer was discharged from the Bankruptcy process and thus all of his debts were discharged and allowed to keep his Exempt Assets

-         -  Only after his discharge did Mrs. Schreyer lean of her ex-spouses bankruptcy status and the fact that he had been down discharged and in turn that her claims against him were also discharged even thought she was not allowed to participate in the bankruptcy process because she was failed to be notified.

-        -     In fact. Mrs. Schreyer did have an equalization claim against the assets of Mr. Schreyer, the majority of which related to a farm property that was a marital asset.

-          -  Mr. Schreyer was allowed to keep the farm property even after a bankruptcy because in Manitoba where the Schreyers resided and where the farm was situated, bankruptcy legislation allows debtors to claim some farm property as Exempt.

-          -  But because Mr. Schreyer was discharged from the Bankruptcy, even through he failed to notify Mrs. Schreyer that he had declared bankruptcy, Mrs. Schreyer’s claim against the farm and house were also discharged and she could not continue to seek equalization payments from Mr. Schreyer

-          -  In essence, due to a quirk in the law, Mr. Schreyer got to lie to the trustee and his creditors, divorce his wife and take all of the family assets for himself.  This outcome is clearly wholly unfair to Mrs. Schreyer.

-          Mrs. Schreyer was only left with a claim in the bankruptcy which ended up being nothing as Mr. Schreyer had not had to pay anything into the bankruptcy estate because all of his assets were Exempt.  Mrs. Schreyer got nothing

 

-          This case wound itself through the Courts system and ended up in Supreme Court of Canada who unfortunately concluded that based on the current laws, the Court could not undo this perceived injustice.

-          Because Manitoba in an “equalization province” it creates a “debtor/creditor” relationship between ex-spouses and as such Mrs. Schreyer has no proprietary rights to the family property

-          Supreme Court suggested that the Bankruptcy and Insolvency Act be amended with respect to the effect of the treatment of equalization claims in a bankruptcy.  Further the Supreme Court noted that Mrs. Schreyer had additional remedies under the BIA such as applying to vary the discharge order of Mr. Schreyer and/or apply for leave from the Bankruptcy Court to proceed against the exempt assets of Mr. Schreyer. (Under Section 69.4 of the Bankruptcy and Insolvency Act)

 

-          In July 2013 Mrs. Schreyer did indeed apply to the Bankruptcy court of vary the discharge order and seek leave to proceed against Mr. Schreyer’s exempt farm assets.  The Court did put aside Mr. Schreyer’s discharge and agreed to the lifting of the Stay of Proceedings and issued subsequently issued a new Certificate of Discharge to Mr. Schreyer but recognizing the rights of Mrs. Schreyer’s equalization rights which will allow her to proceed against the farm property for her interest in this marital asset.

-          Currently this Discharge has been Appealed and we are all awaiting this decision.


The existing Bankruptcy and Insolvency Act did allow for proper procedures and outcome (as it currently stands) to remedy the defect in discharging Mrs. Schreyer’s equalization rights.  How in the future could this issue be avoided and make things easier for the spouses who unfortunately find themselves in similar circumstances?   How to make it easier for creditor spouses in a bankruptcy?

 

1.      BIA be amended to allow the Stay of Proceedings not apply to any claim for equalization or division against exempt assets.  This is in most cases happening now where in most cases spouses are advised of the bankruptcy and appear in court at the discharge to ensure that any discharge Order contains a ‘notwithstanding provision” for exempt assets subject to division of property claims.

2.      BIA be amended to provide that division of equalization against exempt assets are not released under Section 178 of the Bankruptcy and Insolvency Act to ensure that in those cases affected spouses do not lose their rights to pursue against otherwise exempt marital assets.

In the event that these two changes are adopted or seriously considered, there needs to be consideration given as to the need for safeguards put in place to prevent debtor abuse of the changes.  For example, should any discharge only allow the non-bankrupt spouse to proceed against 50% of the debtor’s exempt marital assets?  This would ensure that there was not an attempt at the non-bankrupt spouse attempting to proceed against more than their fair share of exempt assets for equalization claims.