How does Bankruptcy Affect Equalization in Ontario Family Law?

By Ashley Hizo

When a marriage ends, spouses often expect that family property will be divided equally. However, if one spouse declares bankruptcy, the intersection between the Family Law Act (“FLA”)[1] and the Bankruptcy and Insolvency Act (“BIA”)[2] can significantly affect a spouse’s entitlement to an equalization payment.

Understanding how bankruptcy impacts equalization is integral for separating spouses, particularly where one party is experiencing financial difficulties.

What is an Equalization Payment?

Ontario does not divide property by transferring ownership of each asset between spouses. Instead, the Family Law Act provides for the equalization of net family property.

Each spouse calculates the increase in the value of their property during the marriage. The spouse whose net family property has increased the most generally pays one-half of the difference to the other spouse through an equalization payment. The payment represents a monetary claim rather than an ownership interest in a specific asset.

This distinction becomes critically important if one spouse files for bankruptcy.

How does Bankruptcy Affect Equalization?

The Bankruptcy and Insolvency Act broadly defines what constitutes a “provable claim” in bankruptcy. In most cases, debts and liabilities that exist before bankruptcy are included in the bankruptcy proceeding and are released when the bankrupt receives a discharge, unless the BIA specifically provides otherwise.

Unlike child support and spousal support, equalization payments are not exempt from discharge under the BIA. As a result, an equalization claim is generally treated as an unsecured debt. Unlike equalization payments, support obligations are treated differently in bankruptcy because they are intended to ensure the ongoing financial well-being of a former spouse or child rather than to divide property between spouses. For this reason, spousal and child support survive bankruptcy and remain fully enforceable, reflecting the law’s priority of protecting vulnerable family members.

This means that if a spouse who owns an equalization payment declares bankruptcy and is later discharged, they may no longer be legally required to pay that equalization amount.

What Have the Courts Said?

The leading case is Schreyer v. Schreyer.[3]

In Schreyer, the husband declared bankruptcy before the wife’s equalization claim had been determined. Although the wife was later awarded an equalization payment, the Supreme Court of Canada held that her claim was a provable claim in the husband’s bankruptcy. Because equalization is a personal monetary claim rather than an interest in specific property, the husband’s discharge from bankruptcy extinguished his obligation to pay the equalization amount.

The Ontario Court of Appeal reached the same conclusion in Thibodeau v. Thibodeau.[4] The Court confirmed that equalization claims do not receive any special priority under the BIA. While Parliament has chosen to protect support obligations from discharge in bankruptcy through s.178(1)(c) of the Bankruptcy and Insolvency Act,[5] it has not extended the same protection to equalization payments. As a result, unlike child and spousal support, an equalization debt is generally released upon a bankrupt’s discharge unless an exception applies.

What Happens if the Spouse Entitled to Equalization Becomes Bankrupt?

Different considerations apply when the spouse entitled to receive an equalization payment files for bankruptcy.

If that spouse has already started an equalization claim before becoming bankrupt, the claim becomes part of the bankruptcy estate, and the licensed insolvency trustee may continue the proceeding for the benefit of creditors.

However, if no equalization claim has been commenced before the bankruptcy, the trustee generally cannot initiate one on the bankrupt spouse’s behalf.

Bankruptcy and family law are rarely a welcome combination, and when they intersect, the results can be surprising. While support obligations survive bankruptcy, equalization claims generally do not. If bankruptcy is a possibility during a separation, obtaining legal advice early can help you understand your rights.