Can a Payor’s Bankruptcy Affect the Support I Collect?

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Filing for bankruptcy can allow a debtor to restructure their debt. However, bankruptcy can complicate family law issues. Claims for child and spousal support arrears have a special status and survive a debtor’s discharge from bankruptcy. However, a recipient may have other claims, and it is important to know how bankruptcy can impact the parties’ obligations and what actions can be taken so that a recipient can maximize their recovery.

Payor’s Default of Support Payments Results in a Default Hearing

In Ontario (Director, Family Responsibility Office) v. Fiorito, the court considered the issue of jurisdiction over a support payor who had declared bankruptcy. Under a 2014 child support order, the support payor was required to pay the recipient $2,388.00 each month. A further order required her to pay additional dental and other expenses for the children. The payor did not comply with the orders and was fetched with the Family Responsibility Office (“FRO”) for enforcement. By February 2016, the payor filed an assignment in bankruptcy, and a trustee was appointed over the payor’s estate. The FRO sent a proof of claim to the trustee, but the arrears of child support increased since the payor made the assignment in bankruptcy. As such, by November 2017, the arrears under the two orders totalled $51,113.68. The payor argued that only the Superior Court of Justice has jurisdiction over bankruptcy matters in Ontario and, therefore, she argued that when a support payor makes an assignment in bankruptcy, the Ontario Court of Justice has no jurisdiction related to the debts provable in bankruptcy. In contrast, the FRO argued that under the Bankruptcy and Insolvency Act, the enforcement of support orders is not stayed by an assignment in bankruptcy.

The Family Responsibility and Support Arrears Enforcement Act (FRSAEA) provides for a default hearing when a child support order is in default. Additionally, section 69.3(1) of the Bankruptcy and Insolvency Act provides that the enforcement of most claims against an undischarged bankrupt is stayed. However, that does not apply to support claims. Yet, the Bankruptcy and Insolvency Act does restrict the enforcement of a support order:

  1. Against property that has vested in the trustee, and
  2. Against amounts that are payable to the estate of the bankrupt.

The judge agreed with the payor that an Ontario Court of Justice judge lacks jurisdiction to deal with bankruptcy matters. However, he noted that a default hearing is not a bankruptcy matter but is “a family law procedure, the purpose of which is to provide one method for the enforcement of support orders.” This meant that the Bankruptcy and Insolvency Act did not stay a default hearing. Therefore, the default hearing provisions of the Family Responsibility and Support Arrears Enforcement Act and the Bankruptcy and Insolvency Act are not in conflict. As Justice Tobin explained, “[b]oth allow for the important legislative and social objectives of supporting families and ensuring support obligations are honoured.” Permitting the default hearing to proceed ensures that statutory remedies can be pursued to meet the support recipient’s needs.

Court Considers Priority of Support Obligations

When a support payor faces bankruptcy, the recipient may try to protect their financial recovery by applying funds against particular outstanding obligations. Kim v. Kim concerned the enforcement of child support arrears, spousal support, and other expenses owed to the applicant. A final order was provided for the garnishment of several entitlements linked to the respondent. At issue was the treatment of $277,609 in garnished funds that the applicant received, with the court having to determine what amount should be credited to the payor’s spousal support obligation and what amount should be set against the respondent’s property-related debts. The applicant pointed to the common law principle of apportionment, which holds that a creditor has discretion over how to apportion “undifferentiated payments from a single debtor towards multiple debts held by the creditor.” On this basis, the applicant sought an order to allocate all garnished payments to the respondent’s property debts and not to the lump sum spousal support amount owed. Since spousal support obligations survive bankruptcy, the applicant asked the court to permit her to apportion the debt owed to her to maximize her recovery. However, the respondent wanted the payments garnished to be applied to the lump sum of spousal support he owed, arguing that spousal support is a priority debt.

Section 2(3) of the Creditor’s Relief Act provides that a support order has priority over other judgment debts regardless of when the enforcement process is issued. This means that a support recipient may recover funds before other creditors. However, the judge noted that priority in this context referred to priority amongst multiple creditors, not “priority in the allocation of debts to a single creditor.” Therefore, the concept of priority in the Creditor’s Relief Act did not apply to funds recovered from a single debtor who owed multiple debts to the same creditor when those funds were not earmarked for specific debts. Accordingly, the creditor has discretion in apportioning the funds received towards the multiple debts in order to maximize their recovery.

Recipient has Discretion in Apportioning Payments to Payor’s Debts

In this case, the respondent never voluntarily paid money towards the total amount of $791,495 that he owed. The amount of $277,609 that the applicant received was recovered through garnishments. Consequently, he never directed the payments to be set against specific debts. Justice McGee noted that when funds are garnished, the debtor “loses the ability to allocate payments to specified debts.” In Crescent Petroleum Ltd. v. Portserv Ltd., Justice Maczko noted that a creditor should be able to apportion recovered funds as they see fit, because if the debtor is in default and could put the amount against a specific debt, the other amounts could go unpaid. The creditor might not be able to realize the full amount. As he explained, a policy point of view favours the creditor’s right to choose how the funds will be appropriated. The principle of apportionment has also been followed in family law cases. In one case, the husband owed debts for child support and property division and made some payments before declaring bankruptcy.

The court confirmed that the absence of specification by the husband meant that the wife could allocate the payments to the property debt first as the support claim would survive bankruptcy. In Kim v. Kim, the judge was satisfied that the applicant could decide on the allocation of funds in case the respondent made an assignment in bankruptcy or had other creditors.

The Family Lawyers at Johnson Miller Family Lawyers in Windsor Can Help You Navigate Support Disputes

A payor’s bankruptcy involves the intersection of both family law and bankruptcy legislation. Although certain claims are protected, a recipient can still be harmed by bankruptcy, so they must know what steps can be taken to protect their interests and pursue available remedies to recover funds and meet their needs. At Johnson Miller Family Lawyers, our team of experienced family lawyers regularly advise clients on various family law issues, including child support and parenting arrangements. Whether you have questions about support entitlement or are seeking to recover support arrears, our team can help. To schedule a consultation with a team member, call us at 519-973-1500 or contact us online.

 

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