Working as a Vancouver divorce lawyer, I am often struck by how often it is that several bad things happen to someone all at the same time. “When it rains it pours” seems a particularly fitting maxim when practicing family law in Vancouver.
In one case, our firm had signed an opposing party to an agreement that had so effectively cut them off from the family assets that there was a very real risk that they would declare bankruptcy in the middle of the lawsuit. We had to consider how this would affect to the division of family assets were this to occur and how to protect our client.
The timing of a declaration of bankruptcy is important in terms of how it relates to division of property in a matrimonial context. This is because, subject to limited exceptions, at the moment of bankruptcy all of the property of the bankrupt is vested in the trustee in bankruptcy as per s. 71 of the Bankruptcy and Insolvency Act.
Under the Family Law Act, as of the date of separation, each spouse has a right to an undivided one-half interest in all “family property” and is equally responsible for “family debt.” So if a spouse becomes bankrupt after separation, the bankrupt’s one-half interest in all of the family property can vest in the trustee in bankruptcy – this could be property in either spouse’s name.
Normally a one-half interest in the family property for each spouse is the starting point for figuring out the division of assets in matrimonial litigation – parties are then at liberty to apply for reapportionment of these assets under the FLA. Things become murky, though, at this point as case law is contradictory over what seems to happen when one spouse’s claim for reapportionment (in the middle of the matrimonial litigation) butts up against a trustee in bankruptcy’s claim to a bankrupt spouse’s one-half interest in family property. So far the prevailing view is that the bankrupt spouse’s assignment into bankruptcy precludes the non-bankrupt spouse from a reapportionment claim. This means that the non-bankrupt spouse risks losing the family property that they might have otherwise won in court through reapportionment if the other spouse declares bankruptcy too quickly.
Fortunately, we were able to settle the matter before this occurred and the crisis was averted. Divorces are rarely pleasant affairs, and no one needs a lawyer to tell them that adding Bankruptcy to the mix does little to improve them.