Support, Costs & Bankruptcy: Can A Payor Declare Bankruptcy To Escape A Costs Award?

February 5, 2008

By Fhara Pottinger

Support costs and support are obligations that survive bankruptcy. Support is a hot issue in family law and this is unlikely to change in the near future. Occasionally parties who are ordered to pay support (“payors”) will declare, or be petitioned into, bankruptcy either in an effort to avoid paying the support, or because of other debts. Bankruptcy legislation protects the support obligation. Therefore, the payor is still obligated to pay support to the party receiving support (the “recipient”) even though they have declared bankruptcy. However, were you aware that a costs award may also be protected from bankruptcy?

The typical situation goes something like this:

  • One party commences an application, where at least one of the issues is support, either child or spousal.
  • The application proceeds to either a motion or trial in which the recipient is awarded support and costs are awarded against the payor.
  • Until those costs are paid, the payor cannot commence or continue the application before the court. The payor declares bankruptcy and lists the costs award as a liability.

However, the whole of this debt is not extinguished by bankruptcy. Legal costs are protected in the bankruptcy if the underlying claim which led to the costs order is protected.

In other words, support costs are treated the same as the support payment itself. As a result, these costs are neither stayed by the bankruptcy nor released by the bankrupt’s discharge from bankruptcy. However, if the costs are related to custody , or other claims, they are discharged.

The problems arise because family litigation is rarely about one issue. Most of the time the parties are fighting over custody, support, property issues so on and so forth. The recipient has to provide some proof (or evidence) that the costs, or some portion of them, are related to getting or keeping support. If they provide such proof, the debt is protected from bankruptcy and the debt is still owed to recipient spouse. Without this proof, the bankruptcy court will discharge the entire costs award and the recipient will be left with no recourse.

Even worse in some circumstances, the payor can, once again, continue the action or commence an application to vary support.

The type of evidence accepted by the bankruptcy court varies and should be obtained in consultation with legal counsel. The type of evidence that has been accepted includes items such as a letter clarifying the award by the trial judge, an affidavit from the recipient’s lawyer or even affidavit evidence from the recipient.

Sometimes the family law trial judge will find that 100% of the costs relate to support regardless of the mixed nature of the claims. In one case the judge found that that if the payor had acknowledged and accepted his support obligations, there would have been no trial. Therefore, the judge found that all costs awarded at trial were related to support. Therefore these costs were protected from the payor’s bankruptcy and the recipient was entitled to that money.

If possible, in an award of costs on a mixed claim, the recipient should request that the trial judge determine the breakdown of the costs by the trial judge, especially if they suspect that the payor may, willingly or otherwise, face bankruptcy.