Competing Notions of Fairness: A Principled Approach to the Intersection of Insolvency Law and Family Property Law in Canada

Insolvency law and family law in Canada are both aimed at important public policy goals. The Bankruptcy and Insolvency Act allows the financially distressed to shed their debts and have a fresh start at earning income, while also ensuring an effective and organized debt collection mechanism for affected creditors. Family law is aimed at the equitable sharing of the economic consequence of the dissolution of marriage or a common law relationship, and where relevant, allocating responsibilities for children. Whereas insolvency law is federal, many aspects of family law, notably property division, fall under provincial or territorial jurisdiction. Family law and insolvency law frequently intersect, usually where one or both of the parties to a family breakup is financially distressed. Depending on the timing of separation of spouses and the date of bankruptcy, there can be serious issues as to how the property is divided and who has first claim to the value of the assets of the insolvent spouse. Family property claims, in the insolvency context, bump up against the rights of creditors.This article analyses Canadian legislation and judgments that deal with the intersection of family law and insolvency law in the allocation and realization of property, examining the issues that arise, the outcomes and the type of reasoning applied by the courts. Part II sets the backdrop fro the discussion that follows, analysing the gendered terrain when family law and bankruptcy intersect. Part III discusses the sometimes conflicting objectives of insolvency law and family law. Part IV briefly describes the bankruptcy process and the provisions that directly relate to family law claims. Part V describes in some detail the types of family property schemes and their treatment in bankruptcy, and analyses two recent appellate judgments -- Thibodeau v. Thibodeau (Ont. C.A.) and Schreyer v. Schreyer (S.C.C.) -- which both highlight the unfairness that can arise in respect of equalization of family property regimes during bankruptcy. Part VI raises issues in respect of family property held in trust for the non-bankrupt spouse. Part VII briefly touches on the issue of support claims during bankruptcy, and although it is not the focus of this article, it identifies some fairness issues that can arise in relation to spousal support, given the relationship between property division and spousal support. Finally, Part VIII formulates some principles that can be applied when the two frameworks are engaged, including some initial recommendations for legislative change.

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