By Finn Merritt-Neill
Anyone who has been through a divorce understands that it is complicated, both emotionally and legally. What most people don’t know is that a bankruptcy has the potential to complicate further, or even compromise, their position in family law proceedings. Lawyers should be aware of the interaction between the Family Law Act and the Bankruptcy and Insolvency Act and take steps to mitigate those risks.
The case of Kirschner v. Moore is a perfect example. In Kirschner the claimant assigned into bankruptcy mere months before commencing her family law action. What should have been a relatively straightforward division of family property case became a multi-year ordeal in which the claimant nearly had her claim dismissed for not having the legal capacity to commence her action in the first place.
As a result of assigning into bankruptcy, bankrupts vest all their assets and liabilities in their Licensed Insolvency Trustee pursuant to section 71 of the Bankruptcy and Insolvency Act. Lawyers naturally understand that this includes real and personal property, as well as cash and any other property. Section 71 of the BIA is so broad that it also captures causes of action which are considered assets in a bankruptcy. And yes, that includes causes of action arising under the Family Law Act.
The right of a claimant to sue their former spouse thus vests in their Trustee. Family law claims must then either be commenced by the Trustee, or the claimant must make an application under section 38 of the BIA to have their cause of action assigned back to them. If a claimant commences a family law action without having their cause of action assigned back to them, they do so without standing. The claimant in Kirschner spent more than five years in litigation all because she commenced a family law action without having the legal standing to do so.
Family lawyers can take easy steps to protect their clients’ rights by conducting a search of the Office of the Superintendent of Bankruptcy database to determine if their client (or the other side) is an undischarged bankrupt. Court Services Online may also have records of the bankruptcy proceedings, presuming that the Trustee has filed their statutory forms with the court, although this does not happen where bankrupts receive an automatic discharge.
Bankruptcy lawyers should also be aware of the potential for family law proceedings to interfere with their clients’ rights and interests. It does not always occur to the bankrupt to disclose a former spouse’s assets and liabilities to their Trustee. Nevertheless, such assets or liabilities may legally form a part of the bankrupt’s estate. Discovery of such assets or liabilities may lead to the bankrupt losing their opportunity for an automatic discharge, or worse, having their discharge rescinded.
Bankruptcy and family lawyers alike should be alive to the fact that the BIA and the FLA don’t always get along.
