Consumer Proposals Dramatically Affect Limitation Period for Family Law Property Claims

Consumer proposals as an alternative to assignments in bankruptcy have gained popularity in recent years. I recently looked into the issue of consumer proposals and their effect on the limitation period for claims for an equalization of property in family law proceedings. This applies to married spouses, not cohabitees, as only married spouses have statutory property rights.

When a husband or wife who is separated files a consumer proposal, the other spouse should be listed as a contingent creditor and notified by mail. You can obtain an Affidavit of Sending from the Trustee in Bankruptcy to prove this. I will refer to the spouses as the Proposal Spouse and the Creditor Spouse.

At this point, family law representation for the Creditor Spouse is imperative before the consumer proposal is accepted by creditors and deemed to be Court approved. This timeline moves very quickly, as a proposal filed in November can be accepted by creditors in December and deemed to be Court approved in January.

The lawyer must first determine whether the Creditor Spouse is entitled to an equalization payment. If so, the next step is to determine whether or not there are any valuable assets that are exempt from the proposal, such as a pension or LIRA.

Normally a spouse has six years from separation or two years from divorce (whichever comes first) to apply for equalization of net family property. If a claim hasn’t been made and a consumer proposal is filed, this affects the timeline dramatically. The Creditor Spouse must file a proof of claim and take the action outlined below before the consumer proposal is accepted and approved.

As Robert Klotz writes in Insolvency & Family Law (2nd ed. Carswell):

The BIA specifies that when a bankruptcy proposal is accepted and approved, all provable debts are released as in the case of a bankruptcy discharge, save for any monies accruing under the proposal. Approval of the proposal acts, in effect as a discharge. Unless some appropriate dispensation is granted by the bankruptcy court before the proposal is approved, this may have the effect of irretrievably prejudicing the equalization claim against the pension. This, then, is another possible limitation period.

The correct action for the Creditor Spouse to take prior to approval of the proposal is to apply for leave of the Bankruptcy Court to lift the stay to pursue an equalization claim against the exempt assets. If he or she does not do so, the limitation period created when the proposal is approved will be missed.

* Written by Elizabeth Goldenberg, LL.B.. Elizabeth has practised family law in London Ontario for 25 years.