Dealing With and Dividing Debt During Divorce in BC

Most couples incur debt and so upon divorce, that debt must be divided or addressed. This article explains dividing debt during divorce in BC.


 Past due debt notice

Although there are no provisions in the Family Relations Act that specifically refer to debt, there are some circumstances where financial liabilities may be characterized as “family debt.”  Debts are typically considered under the fairness provisions found in s. 65(f) of the FRA.[1]  While the term “family debt” is often referred to in case law, it is important to note that this is simply a term of convenience and it has no statutory significance.  It is often used to differentiate a specific debt incurred for family purposes from one accumulated for an individual benefit.  What is considered a “family debt” will depend on the circumstances in which it was incurred.

What is a “family debt”?

Although the British Columbia Court of Appeal was clear in Young v. Young that a court cannot

“make a spouse jointly liable to a creditor for a debt of the other spouse, no matter for what purpose it was incurred, or, in the absence of some contractual foundation, make one spouse liable to indemnify the other, either in whole or part, for the liability of the latter,”[2]

the same court clarified that there are some situations where family debts may exist.[3]  Generally speaking, a “liability associated with the acquisition, maintenance, or improvement of a family asset would fit the description” of a “family debt.”[4]  Debts incurred to support the education or recreation of either of the spouses or any of the children may also qualify as family debts.

Who is liable for a family debt?

In Mallen v. Mallen, the Court of Appeal noted that the common practice of the lower courts was to total the family debt, offset it against to total of the family assets, and then divided the remainder in two in accordance with the s. 56 allocation of property and s. 65 fairness provisions.[5]

The court concluded that this practice was problematic because the FRA does not specifically allow for it.  There is no provision that requires liabilities incurred by families to be shared equally upon the breakdown of marriage.  The only authority for this is the s. 65(f) reapportionment for unfairness due to “liabilities of a spouse.”[6]  While liabilities of a spouse that may be taken into consideration are not restricted to “family debt,” the court noted that these debts are the type that “fairness will more readily demand a re-apportionment of family assets as opposed to non-family debts.”[7]

How do I get a re-apportionment of liabilities in consideration of family debt?

After Mallen, debts incurred by one spouse for a family purpose will not automatically be included when the division of property is determined.

For example, say Kevin and Sarah were married for 18 years and had a 16 year-old son, Patrick, who played travel hockey.  For the past three years Patrick’s hockey cost $4000 a year and was paid using Kevin’s personal line of credit.  Although Kevin did not have the money to pay for the hockey, he felt strongly that Patrick deserved to play.

Previously, it was likely that this debt would be automatically considered during the division of family property.   However to have this debt considered now, Kevin will have to seek a re-apportionment under s. 65(f) of the FRA and satisfy the court that fairness requires that the other spouse assume a share of the burden.

A court faced with an application like the above must confine its “vision of fairness” to s. 65.[8]  Therefore, even though it may seem fair at first glance to reapportion the debt because of the manner in which it was acquired, the imposition of the liability on the other spouse may be unfair.

For example, Sarah may argue that she specifically asked Kevin not to buy extra ice-time for Patrick to practice because the family was having trouble putting food on the table.  She may be able to present evidence that Kevin promised to assume the debt himself.

What if the a potential debt was incurred by both parties, but it has not yet happened?

The Supreme Court of Canada considered this potential issue in Stein v. Stein.[9]  In this case, the trial judge determined that both parties had benefited during the marriage from tax shelters registered in the appellant’s name.  The judge held that any future liability arising from these investments should be equally divided between the parties.  Expert evidence demonstrated that it would be impossible to set an amount at the date of the trial so the judge ordered that the parties would “share equally in any liability related to the reassessment or winding up of the tax shelters.”[10]

The Court of Appeal overturned this order maintaining that the FRA did not allow for such “freestanding” division of debt, but the Supreme Court of Canada allowed the appeal.  The Court maintained that the Act “does not preclude an order dividing between spouses a contingent liability which cannot be valued at the time of trial.”[11]

Therefore the fact that a liability does not exist at the time of the apportionment of assets does not preclude a court from ordering the division of one in the future.

 


[1]Family Relations Act, RSBC 1996, c 128, s. 65(f).
[2] Young v. Young [1990] BCJ No. 2254 (C.A.)
[3] Mallen v. Mallen [1992] B.C.J. No. 648 (C.A.).
[4]Family Relations Act, surpa at note 1.
[5]Ibid.; Mallen v. Mallen, supra.
[6]Family Relations Act, s. 65.
[7] Mallen v. Mallen, supra.
[8] Ibid.
[9] Stein v. Stein (2008) 294 DLR (4th) 251; [2008] WWR 385; 79 BCLR (4th) 1.
[10] Ibid.
[11] Ibid.


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