July 20, 2011

Equalization Claim Released Upon Bankruptcy

The Supreme Court of Canada handed down an extremely important decision this week in Schreyer vs. Schreyer essentially stating that existing Canadian law (Bankruptcy and Insolvency Act) operates to release a debtor spouse who has been discharged from bankruptcy, from any equalization claim owing to his creditor spouse upon the division of the net value of family assets. Mr. Schreyer (the bankrupt) not only ended up with the farm (exempt property in a bankruptcy), but the entirety of the equity therein, effectively wiping out Mrs. Schreyer’s equalization claim under the Manitoba Family Property Act.

Writing for a unanimous Court, Mr. Justice Lebel recognized what some would perceive as the inequity of the outcome of this case and what it could mean to other “equalization creditor spouses” when confronted with the bankruptcy of their “equalization debtor spouses”. The Supreme Court sounded a clear message in reluctantly applying the letter of the law as it now stands while suggesting that Parliament bring the required legislative changes to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes.

Indeed, the Schreyer case underscores the necessity of amending the Bankruptcy and Insolvency Act without further delay, to provide at least as a general rule, that bankruptcy will not stay or release any equalization claim or division of exempt assets under provincial legislation regarding the equalization and/or division of marital property. However, until the law is changed, lawyers have to find “creative solutions” for their creditor spouse clients in such situations. Such “creative solutions” could involve the appropriateness of a spousal support award or a variation (increase in quantum) in an existing award to mitigate the inequities arising from the bankruptcy of the debtor spouse and his release from the payment of an equalization claim or his retention of an exempt asset, the value of which was moreover taken into account in determining the very equalization claim which he no longer has to pay.


The information contained in Family Law Matters is intended to be informative only and not to be understood as constituting legal advice. The information should therefore not be used as a substitute for the advice of qualified legal counsel which must necessarily be tailored to the individual’s particular set of circumstances.