Introduction

Canadian law exempts certain, not insignificant debts from the whitewash of bankruptcy.

In some ways, the shield goes against the grain of bankruptcy which is designed to wipe the slate clean and return the individual to GO, without any debt baggage from his past.

But then there are two inescapable facts. 

First, some debts are sacrosanct and simply must attach permanently to the debtor.

Secondly, some debtors play the bankruptcy law. In the result, the federal government has designed a set of exemptions: a list of debts that are not wiped clean because of the debtor's bankruptcy and, in theory, follow him around for life and for which he is liable for enforcement no matter how many times he goes bankruptcy.

For the creditor, an exempt debt is like a super priority. He or she does not have to take 20¢ on the dollar owed as do the creditors who suffer the bankruptcy.

The Policy

In Martin, at ¶11, Justice Deschênes of the the New Brunswick Court of Appeal adopted these words to describe why the law took exception to certain debts being wiped clean by bankruptcy:bankruptcy shield

"... the types of debt which survive bankruptcy are any debts arising out of fraud, are based on an overriding social policy that certain claims should be protected against the general discharge obtained by a bankrupt because of the class of claimants involved, in the present case, the victim of an assault causing bodily harm, and because of the reprehensible nature of the bankrupt’s conduct....

"(T)he types of debt which survive bankruptcy are any debts arising out of fraud, dishonesty or misconduct while acting in a fiduciary capacity.

"Parliament has clearly made a policy decision that a bankrupt should not be allowed to raise the shield of his or her general discharge against judgment creditors who hold judgments grounded on such reprehensible conduct. (T)hose kinds of conduct are unacceptable to society and a bankrupt will not be rewarded for such conduct by a release of liability."

In Simone, Justice Blair wrote:

"An important purpose of bankruptcy legislation is to encourage the rehabilitation of an honest but unfortunate debtor, and to permit his or her re-integration into society -- subject to reasonable conditions -- by obtaining a discharge from the continued burden of crushing financial obligations which cannot be met.

"Debts which survive a bankruptcy ..., therefore, are exceptions to this overriding principle, and should be addressed accordingly."

The Statute

The exemptions are codified in the Bankruptcy and Insolvency Act of Canada (BIA), §178(1):

"An order of discharge does not release the bankrupt from: any fine, penalty (or) restitution order; ....any award of damages by a court in civil proceedings in respect of bodily harm intentionally inflicted, or sexual assault, or wrongful death resulting therefrom; any debt or liability for alimony or alimentary pension; any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance ...; any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation....; liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim; (and) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students...."

Where there are lawyers and money involved, there are split hairs. as words such as fiduciary duty and fraud are beaten to death.

Many of the exceptions have been challenged and judicially massaged.

Like tracking an insect flying around a dark tent, it is difficult to keep track of the latest decisions which pull bankruptcy law this way and that but there are a few solid statements of law that have pushed through:

► The exemptions don't just apply to bankruptcy but also to consumer proposals under the BIA (Re Cardwell).

► Not all breaches of obligation by a fiduciary expose the debtor to the shield. In Re Di Paola, the Ontario Court cited Simone and suggested that the conduct have "some element of dishonesty, wrongdoing or misconduct."

► In Bankruptcy of Kenneth Chaytor, a British Columbia bankruptcy judge (Bouck) declined to hold a provincial automobile insurance agency fine as qualifying under the exemptions, as it was not criminal in nature. She said that that the exceptions:

"... must be read restrictively.... Parliament intended only those civil judgments in respect of bodily harm intentionally inflicted, sexual assault or wrongful death resulting therefrom to survive discharge. If Parliament had intended civil judgments arising from motor vehicle accidents to survive bankruptcy, that exception would be clearly stated."

► A judgment against a debtor for defamation is not exempt. In Re Marshall, the Ontario court wrote that the relevant exemption claimed "clearly refers to debts arising from a criminal act."

Matrimonial property settlements are not uniformly treated by Canadian courts. The law seems clear enough and if they are to be interpreted restrictively, it seems that they would not qualify. Indeed, in Bankruptcy and Insolvency Law in Canada, at page 6-241, the authors write:

"If, prior to bankruptcy, an equalization payment has been ordered under provincial family law legislation, an order of discharge will release a spouse from the liability."

However there are cases in which the judge does cartwheels to protect a spouse on the verge of losing her share of family assets due only to the timing of her ex-spouse's bankruptcy (for example, Boe).

Conclusions

This is a complicated area of bankruptcy law and, arguably, inappropriate for a relatively short legal information article. Many debts may or may not qualify under one or the other of the exceptions and have simply not yet been properly argued before the court, or never reported to other lawyers. The idea of this article is to give the reader a clear concept that not all debts are washed away by bankruptcy and that the federal government has a fairly good list of exceptions to catch the more egregious liabilities. Still too many debts fall through the crack as the law wrestles between the financial absolution of the debtor, and the harm done to innocent creditors.

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