Bankruptcy and Spousal Support
Spousal Support: A Debt that Cannot be Erased
Following a divorce, many debtor spouses find themselves pinching pennies to make support payments.
When Divorce Costs as Much as the Marriage Ceremony
Divorce is expensive. It can often leave long-lasting financial problems for one or both parties. After a court grants a divorce and dissolves the legal bonds of marriage, debt obligations, separated incomes and assets, and even spousal support payments can contribute to post-divorce financial difficulties.
In addition, legal expenses of the divorce itself can create financial strain on top of everything else. When the dust finally settles, it may be difficult to regain a financial foothold and rebuilding a savings account may be nearly impossible.
Following a divorce, some parties turn to bankruptcy to deal with overwhelming financial setbacks. While bankruptcy can help restructure debt and gain time to rebuild a financial future, it does not automatically erase every outstanding obligation.
Related: Alimony & Spousal Support Guidelines
Canada’s Bankruptcy Laws Limit Dischargeable Debts
The national Bankruptcy and Insolvency Act (BIA) is the controlling law across all provinces and territories for all bankruptcy-related matters. In addition to the federal law, provinces and territories may also impose supplementary rules related to bankruptcy proceedings. All provincial and territorial laws must comport with the federal mandates of the BIA.
Addressing the issues governed by both federal and provincial or territorial law in bankruptcy proceedings can lead to complex and confusing legal questions and determinations. The advice of an attorney is a valuable asset when bankruptcy discharges collide with obligations like court ordered spousal support.
Pursuant to the BIA, codified at R.S.C. 1985, spousal support is not an allowable debt subject to discharge under most bankruptcy claims. Despite the mandatory wording of the law, there are loopholes to the discharge rule.
The Supreme Court of Canada ruled in 2011 that instances exist when spousal support payments may fall into a category of provable claims for purposes of bankruptcy. Exposing a loophole in the bankruptcy law, the Court’s discussion of spousal support and bankruptcy identified a need for revisions to Canada’s existing statutes and demonstrated the comity and conflict that often exists between competing laws written to satisfy different purposes.
Bankruptcy Can Be Used to Free Resources
One or both former spouses commonly experience financial difficulty following a divorce. Divorce carries a financial burden and price tag that many splitting couples cannot appreciate until the final decree — and bills — arrive in the mail. The lasting effects of a divorce can linger for years, affecting personal debts, income, taxes, and credit ratings.
Spousal support is an obligation that some ex-spouses find especially burdensome as a reminder of both personal and financial losses after a divorce. They may see support payments as punitive and sometimes seek various avenues to avoid payments — including bankruptcy.
Despite the appeal of a fresh start, bankruptcy is only a possible alternative to discharge credit card debt, loans, and other consumer-oriented obligations. The law does not include spousal support payments as qualified debts eligible for discharge, and thus, will remain following a bankruptcy.
However, when other debts and payments drain bank accounts and consume paychecks, bankruptcy can alleviate financial strain related to spousal support payments. A bankruptcy application pursuant to the legal provisions of the BIA provides relief because it allows a former spouse to restructure debt and payments. Once a bankruptcy court approves a more manageable payment schedule, a debtor spouse may have an easier time making spousal support payments.
Get Help With Debts Today
Before pursuing a bankruptcy as a means to end alimony or court-ordered spousal support payments, consult a family law attorney who is familiar with federal bankruptcy statutes and associated provincial and territorial laws. Failing to make spousal support payments can carry serious and costly consequences. Using bankruptcy as a tool to meet obligations may be a viable alternative, so long as insolvency is not expected as an excuse to avoid payments. Contact Fine & Associates for a consultation today.