When a couple goes through divorce or separation, multiple payments may have to be made either via lump sum or on an ongoing basis from one party to another. In addition to monthly obligations such as spousal support and child support, one-time considerations arise through property division, including the division of home equity or retirement savings.
When one party to a separation falls behind in payments and builds up a number of different types of debt, which one should that payment be applied to? As we see in a recent decision of the Ontario Superior Court of Justice, various debts are treated differently if someone was to declare bankruptcy, making the question an important one if the party expecting to receive the payment is not confident the rest of it will come due to an event such as bankruptcy.
Husband owes $791,000 to former spouse
In Kim v. Kim, the parties were separated in 2005 after twenty years of marriage. In 2010, an order was granted for various arrears from the husband, including unpaid spousal support (including an outstanding lump sum payment), child support, and an equalization payment. The total amount owing exceeded $791,000. As the husband continued to make payments toward these debts, they were subject to garnishment. The issue before the court was which debt the amounts collected via garnishment should be applied to.
On the surface, it may seem that it if someone owes a significant amount of money to one person, the total could be treated as a single debt. However, a key difference between property related-debts and those related to spousal support is that spousal support debts survive bankruptcy, while property-related debts do not. The amount collected at the time of the trial had totalled $277,609.
Wife says she should have discretion over how debt payments are applied
The husband took the position that all payments garnished at the time of the trial first be applied to the $480,000 lump sum spousal support he owed. The wife, in the meantime, asked for the funds collected to be applied to property-related debts. The wife’s concern was that she would not be able to collect property-related debts from the husband if he were to declare bankruptcy.
The court mentioned that there is some nuance to the issue and that it had to ask whether it was dealing with “a determination of the allocation of undifferentiated monies to debts owed to the same creditor, or an assessment of the priority of debts owed to a single creditor.” If the court was dealing with the former, then the wife would have the discretion to decide which debt to apply the payments for. However, if an assessment of the priority of debts was required, the court would have to turn to the Creditor’s Relief Act, which states that support orders have a priority over some other types of debts. The court wrote that it was clear that the Creditor’s Relief Act,
“Does not apply to funds received from a single debtor for multiple debts owed to the same creditor when specific payments are not earmarked for specific debts. It follows that a creditor has the discretion to apportion an undifferentiated payment towards multiple debts as he or she sees fit to maximize recovery.”
With that answered, the court went on to apply the law to the fact of the case before it.
Courts have given weight to the idea of a creditor having say in how debts are applied
In its analysis, the court looked at a 1997 decision from the Supreme Court of British Columbia, which held that when a creditor was able to seize money owed to it by a corporation, the debtor does not have the right to choose which debt that payment would be applied. The court ultimately reviewed a number of decisions from across the country and came to the same conclusion.
The court also turned its attention to how the debt payments had been collected, noting that the husband had not made any voluntary payments towards the original judgment and that all payments received were collected through five court garnishments. The involvement of third parties in the garnishment process is important because it leaves the husband a further step removed from the payment process.
In its decision, the court wrote the wife,
“Has the right to allocate the garnished funds as she sees fit to maximize her recovery. She chooses first to apply monies to the property claims and only thereafter to the lump sum of spousal support. I, therefore, give effect to the relief that she seeks in this Motion to Change, including the request to have the $480,000 lump sum spousal support award enforced by the FRO.”
In addition to the principal amount owing, the husband was also ordered to pay an additional $20,000 in interest.
Work with the family law lawyers at Johnson Miller Family Lawyers if you are having trouble collecting spousal support
The financial aspect of divorce or separation can increase the pressure on everyone involved. However, it’s also important to understand the impact that non-payment of support can have on someone who relies on that money to meet their daily cost of living. It should also be stated that high net worth households may require a more complex approach to assert division and support. The experienced family law team at Johnson Miller Family Lawyers has extensive experience in helping clients with a wide range of family law issues, including those discussed today. We’re fortunate that many of our clients are referred to us by current or former clients, which we hope gives you the confidence to trust us with your family’s legal needs. To see if we are the right legal team for you, please reach out to us online or by phone at 519-973-1500 to book an initial meeting today.