Equalizing debts — face value or real value?

Married spouses share in any increase in the value of family property between the date of marriage and the date of separation.  When the marriage ends, the spouse with the lower Net Family Property receives a payment for one-half the difference in the two.  That means an equalization payment.
The debt that a spouse brings into the marriage will impact on the spouse’s equalization entitlement.
What happens when the face amount of the debt is greater than its “real value”?  Should a court reduce the face amount of the debt to reflect the likelihood that it will remain unpaid?  The Ontario Court of Appeal was recently confronted with that issue for a debt owing on the date of marriage.
In the case of Zavarella v. Zavarella, the Court of Appeal discounted the wife’s date of marriage debt to zero.  The wife owed about $60,000.00 on the date of marriage.  She had made an assignment into bankruptcy a few weeks before the date of marriage.  Under the Bankruptcy and Insolvency Act, the debt remained owing until the wife’s discharge from bankruptcy.  Given the wife’s assignment into bankruptcy just before the marriage, there was no prospect of payment of the debt.  The Court discounted the debt to zero.
The Zavarella case is consistent with the Court’s approach of discounting of family debts based on likelihood of repayment.  In the past, the Court of Appeal has discounted debts owed to family members because they are not likely to enforce them.  The Court has also allowed parties to discount assets based on the contingent costs of realizing the asset.  The court has allowed parties’ to reduce the value of those assets by the anticipated legal fees on the date of separation.
In each case, the Court has used a prospective approach rather than hindsight in valuing the debt.

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