Court urges closure of bankruptcy loophole

The Supreme Court of Canada has ruled a Manitoba man does not have to pay his ex-wife an equalization payment on their marital home because he filed for bankruptcy.

The Court acknowledged the unfairness of the ruling in Schreyer v. Schreyer, which occurred due to the cross-purposes of bankruptcy and family law. Since an equalization claim under Manitoba’s Family Property Act is handled as a debt, Mr. Schreyer’s bankruptcy eliminated anything he owed his ex-wife.

“Despite the apparent injustice of the outcome, it is impossible to wish away the fact and problem of the respondent’s bankruptcy,” wrote Justice J. Lebel in the judgment, calling for a change in the law.

Linda Cartier, president of the Academy of Financial Divorce Specialists, agrees legislators need to close this loophole.

“It opens the door for people to intentionally declare bankruptcy so they can get around [equalization payments],” she says. “Some people will go to any lengths to have their revenge.”

In a further twist, Mr. Schreyer gets to keep the home, which is a farm. In Manitoba, farms are exempt from bankruptcy.

The Schreyers married in 1980 and separated in 1999. They divorced in 2000 and agreed to an equalization payment of $41,000 for Mrs. Schreyer’s share of the farm. However, Mr. Schreyer declared bankruptcy in 2001, unbeknownst to his ex-wife.

As a result, Mrs. Schreyer didn’t apply to the bankruptcy judge to seek a claim against the farm under the Bankruptcy and Insolvency Act.

Had they registered the property in both names, the whole situation could have been avoided, says G. Bruce Clark, a family lawyer with Clark Farb Fiksel in Toronto. He suggests advisors urge their clients to do so.

“There are many consequences that can result when a property is taken in one name alone,” says Clark. This is especially true in Ontario and Manitoba, provinces with equalization regimes relating to marital assets. Other provinces divide assets upon dissolution of a marriage.

“In a highly changing market, the spouse who owns the house can either be a big winner or loser,” says Clark.

This is because the equalization payment is determined on the date of separation. Since it’s not uncommon for divorce cases to take years to unravel, swings in property value in the interim could mean vast differences between the amount of the equalization payment and the value of the home at the time of payment.

“If a property is held jointly, then the value [of the payment] will rise and fall with the market,” says Clark.

Cartier offers another safeguard to unfair division of assets. “I encourage everyone prior to marrying to have a marital or cohabitation agreement,” she says. “That’s the number one protection, because you would have fully discussed each others’ finances. It sets a totally different tone as to how people will behave going forward.”

Clark notes the possibility of bankruptcy only applies to a limited number of people; namely, those in dire financial straits. Such a strategy won’t work for the average client.

Regardless, he says, “It’s going to be incumbent on every family law lawyer not only to consider their property claims, but to also consider the impact of a possible bankruptcy on such claims.”

He suggests lawyers search bankruptcy databases throughout the divorce proceedings to see if the ex-spouse has filed. In the Schreyer case, 11 months passed between Mr. Schreyer’s bankruptcy filing and discharge dates, and presented a window of opportunity for his ex-wife to seek a claim.

Clark is hopeful this high-profile case will prod the government to amend bankruptcy legislation to exempt equalization payments. A Senate committee recommended such a move in 2003.

“When the SCC says, ‘Wake up, we need to change this,’ it’s a little harder for the federal government to ignore it,” he says.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.