What Happens to a Family Law Costs Order When a Party Goes Bankrupt?
In family law disputes, it’s not uncommon for courts to issue costs orders—decisions requiring one party to pay some or all of the legal expenses of the other. But what happens when the person ordered to pay costs files for bankruptcy?
Does the bankruptcy wipe out their obligation? Or can the creditor still enforce the court’s order?
Here’s what Ontario family law and bankruptcy legislation say about it.
🔒 Bankruptcy Triggers a Stay of Proceedings
When a person files for bankruptcy, section 69.3(1) of the Bankruptcy and Insolvency Act (BIA) kicks in. This section automatically stays (halts) all enforcement proceedings against the bankrupt, including efforts to collect on a costs order:
📘 “On bankruptcy, no creditor shall have any remedy against the debtor or the debtor’s property, or shall commence or continue any action for the recovery of a claim provable in bankruptcy.” – BIA s. 69.3(1)
So, if a costs award has already been made, and the payor then files for bankruptcy, enforcement is paused. This includes wage garnishments, property seizures, and court motions to compel payment.
⚖️ Can the Stay Be Lifted?
Yes—but only in specific situations.
Under section 69.4 of the BIA, the creditor (in this case, the person owed legal costs) can apply to lift the stay. A court may allow enforcement to resume if:
- The creditor is likely to be materially prejudiced by the stay, or
- It is equitable (i.e., fair) on other grounds.
💡 “The court may make such a declaration… if it is satisfied that the creditor or person is likely to be materially prejudiced… or that it is equitable on other grounds.” – BIA s. 69.4
However, if no such application is made, the stay remains in effect, and the creditor cannot enforce the costs order without permission from the court.
🔍 Timing Matters
In some family law cases, courts have struck pleadings (i.e., barred a party from continuing litigation) for failure to pay costs. But what if bankruptcy happens before such a motion is heard?
In Carpenter v. Carpenter, 2016 ONCA 313, the party filed for bankruptcy after the costs order was enforced by striking pleadings—so the bankruptcy didn’t shield them.
But when a person files for bankruptcy before enforcement, the situation changes. The costs order is stayed, and pleadings typically won’t be struck solely due to unpaid costs unless the court lifts the stay.
🚩 Suspicious Timing? It Matters, But It’s Not Enough
Filing for bankruptcy immediately after consenting to pay costs can raise concerns about bad faith. But even suspicious timing doesn’t void the bankruptcy’s legal effect.
Still, courts may view this behaviour critically, especially if the creditor challenges the bankrupt’s discharge or seeks equitable relief under s. 69.4.
💼 Options for the Creditor
If you’re owed costs and the payor files for bankruptcy, you still have legal tools available:
- File a claim in the bankruptcy estate to participate as a creditor.
- Oppose the bankrupt’s discharge if you believe there was misconduct or unfairness.
- Apply under s. 69.4 to lift the stay and pursue enforcement (if justified).
Courts have ordered discharged bankrupts to pay outstanding costs or post security in subsequent proceedings—particularly where costs survived bankruptcy (e.g., when related to support).
✅ Key Takeaways
- A costs order is stayed when a party declares bankruptcy (BIA s. 69.3).
- Creditors can apply to lift the stay (BIA s. 69.4), but must prove prejudice or equity.
- Courts have the discretion to enforce costs after discharge, especially in bad-faith bankruptcies.
- Support-related costs survive bankruptcy; others may not.
- Timing matters—bankruptcy before enforcement limits the court’s power to act.
DISCLAIMER:
The information provided in this blog is for general informational purposes only and does not constitute legal advice. No attorney-client relationship is established through this writing. You should consult with a qualified attorney for advice tailored to your specific situation. The lawyer and their firm disclaim any liability arising from reliance on this blog or any other content on this website.