On July 14, 2011 the Supreme Court of Canada released its decision in the case of Schreyer v. Schreyer.

Why are we discussing a Supreme Court of Canada decision in a blog about bankruptcy in Canada? Because this case confirms a long held principle of bankruptcy law, but it also forces us to consider whether changes to bankruptcy law are required.

You can read the entire case on the Supreme Court of Canada’s website, but here’s a simple summary:

Mr. and Mrs. Schreyer divorced in 1999, and as is standard procedure, their assets were to be divided amongst them. Mr. Schreyer was to make an equalization payment to Mrs. Schreyer of about $41,000.Where both parties own assets, and one of the parties will be retaining one of the assets, that party pays the other their share.

For example, if the wife’s only asset are shares in a business worth $100,000, and the husband has no assets, upon divorce the wife may be required to make an equalization payment of $50,000 to the husband. By doing so, after the divorce, they both end up with $50,000 in assets, so they each have half of the total assets they had while married.

In the case of Schreyer v. Schreyer the asset was a family farm, and Mr. Schreyer was ordered to pay $41,000 as an equalization payment to his wife.

However, before that payment was made, Mr. Schreyer declared bankruptcy. Mrs. Schreyer therefore became a creditor of his in his bankruptcy. Under Manitoba’s The Judgments Act, the family farm was exempt from execution by creditors.  That meant that Mr. Schreyer kept the farm when he went bankrupt, and his wife got nothing.

(It should be noted that the law is different in each province. For example, in Ontario there is no exemption for real estate, so in Ontario if the bankrupt owned a farm worth $80,000, the trustee may sell the farm and distribute the proceeds to the creditors, so had this happened in Ontario, Mr. Schreyer would have lost the farm when he went bankrupt, or he would have been required to pay into his estate the value of the farm).

Is this fair?

According to bankruptcy law, your debts are extinguished when you go bankrupt, so on that basis yes, it’s fair.

However, the Bankruptcy & Insolvency Act does give special treatment for child support, in section 178 (1) (c), which states that the following debt or obligation is not discharged in a bankruptcy:

any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

In other words, if you go bankrupt, you are still required to pay child and spousal support.

So, why, if you file bankruptcy in Canada, are you not required to make equalization payments to your former spouse? That’s a good question, and I suspect that the law will be changed to close this loophole; it’s certainly received a lot of press since the decision was released.

Parliament moves slowly, so we shall see how long it takes for the government to act.  Regardless of their speed, I believe that it is time for the government to change the rules regarding divorce and bankruptcy.