What happens to the family heritage when you divorce and go bankrupt at the same time? During a divorce, unless a judge decides otherwise...
What happens to the family heritage when you get divorced and go bankrupt in the same period?
During a divorce, unless a judge decides otherwise, there is an equal division of the total value of each spouse's assets making up the family heritage, after deducting debts contracted for the acquisition, improvement, and maintenance of the assets. Therefore, the spouse with the higher net value of assets must compensate the other in cash or assets.
It should be noted that the division of heritage only occurs at the time of separation, divorce, death, or nullity of the marriage. Quebec law in this matter constitutes a hybrid system, partly based on a right to claim and partly based on a right of ownership.
For example, a husband, one month after agreeing to share his RRSP (Retirement Savings Plan) as part of a family heritage sharing agreement endorsed by the Superior Court, declares bankruptcy and assigns his assets. He then asks the bankruptcy trustee to suspend the execution of the sharing.
The husband claims that his wife only has a simple right to claim on his RRSP, which is not seizable under the Bankruptcy Act, and therefore he does not have to transfer it among the assets shareable among his creditors. In accordance with the judgment endorsing the sharing agreement, the Court of Appeal* confirms that the wife has become the sole owner of the RRSP upon sharing. It is a "natural execution of property", ordered by a competent court. Moreover, the rights accumulated in an RRSP forming part of the family heritage are exempt from the seizure by the bankruptcy trustee.
The decision could have been different if the sharing agreement did not involve an RRSP and if the sharing had been made in cash instead of property.
Before getting involved in divorce proceedings, when one's spouse is considering declaring bankruptcy, it is better to verify in advance the consequences on the sharing of the family heritage and assets. Sometimes, it is preferable to wait a little longer to finish faster.
*CA 200-09-009030-153
