Debts related to support or maintenance are not discharged through bankruptcy
The Court of King’s Bench of Alberta ruled that legal costs related to support issues from family law arbitration survive bankruptcy but do not have preferred status.
The dispute in Martin (Re), 2024 ABKB 591, stemmed from a divorced couple's dispute. Following arbitration, the father sought child support and legal costs. The mother, who declared bankruptcy in 2022, argued that no support was awarded and that the related legal costs should not survive her bankruptcy.
In March 2022, an arbitrator ruled on several family law issues, including parenting time, child support, and property division. The arbitrator determined that no child support was payable between the parents, as they had equal incomes and shared parenting responsibilities. Despite mixed success, the father was awarded $78,517.50 in legal costs. Following this ruling, the mother filed for bankruptcy in October 2022 after a failed consumer proposal.
The father later sought to have a portion of the legal costs, specifically related to child support issues, survive the mother's bankruptcy. In a January 2024 decision, the arbitrator apportioned 40 percent of the legal costs, or $31,407, to support-related issues. The mother was discharged from bankruptcy in February 2024.
The Alberta Court of King’s Bench had to determine if the legal costs related to support issues could survive bankruptcy. Under Canada’s Bankruptcy and Insolvency Act (BIA), debts related to support or maintenance are not discharged through bankruptcy. The court found that the legal costs, being associated with the determination of child support, fell within this exception and thus survived the mother's discharge. However, the court rejected the father’s claim that these costs should have preferred status in the bankruptcy, meaning they would not take priority over other claims.
The court also addressed the issue of who should receive the proceeds from the sale of a partially exempt property. The mother claimed entitlement to approximately $13,000 from the sale of the family home, which was held by the bankruptcy trustee. The father argued that these funds should cover the surviving legal costs. However, the court ruled that the mother was entitled to the proceeds since the father had not taken the necessary legal steps to claim the funds.
Ultimately, the court allowed the legal costs related to support issues to survive the bankruptcy but did not grant them preferred status, allowing the mother to retain her right to the exempt sale proceeds.
