Bankruptcy and Divorce

Bankruptcy, financial difficulties, divorce and the breakdown of a marriage often run together. It is very far from unknown for one of the spouses to be facing bankruptcy at the time of a divorce. So what would be the effect of a bankruptcy order on the financial settlement and division of the family assets in the divorce settlement?

On divorce everything owed by the spouses falls into one matrimonial pot. If one of the spouses is bankrupt, his or her assets do not belong to them but to the trustee in bankruptcy. This is going to have serious implications for the other party, as they are likely to have no claim on these assets as against the bankrupt’s creditors. The matrimonial pot for division is going to be much smaller.

Very often, the main matrimonial asset will be the family home which is likely to be jointly owned. Particularly if there are young children, the one spouse will wish to remain living in the home and probably seek an order that it be transferred to her. Although this may well be ordered against the other party in a divorce, the court cannot make a property adjustment order against that parties’ trustee in bankruptcy. The half share in the property will be owned by the trustee, and he has a duty to sell and realise that share for the benefit of creditors.

Similarly, a bankrupt spouse is unlikely to be able to pay a lump sum or any maintenance to the spouse or children. He will have no assets to sell to realise money or anything which the court could order to be sold or transferred. Any income will be taken by the trustee for the payment of creditors and will not be available to the court for settlements on the other spouse.

So what can be done? The answer can only be to act quickly if there is the possibility of your spouse being declared bankrupt. Remember that some vindictive spouses will deliberately declare themselves bankrupt to frustrate matrimonial claims. If this seems possible or is threatened, make an immediate application to the court so that financial orders can be made before the bankruptcy order. If an order is made, there is the possibility of the trustee applying to have it set aside but in all probability this will be unlikely except where the debts are very substantial.

There have been cases where a spouse has deliberately filed for bankruptcy even though it is possible to show that he is not insolvent. Should this be the case, it may be possible to apply to the court for the bankruptcy to be set aside. It may also be possible to show that notwithstanding the bankruptcy there are still funds available for the payment of maintenance.

Any pension owned by the bankrupt is an exception and does not pass to the trustee in bankruptcy. The court may therefore be able to minimise the effect of the bankruptcy by making a pensions sharing order transferring the benefit of the pension to compensate for other items.

If a spouse is awarded a lump sum in divorce proceedings, or if there are outstanding maintenance or court costs, these are provable in a bankruptcy. You will rank equally with other creditors but unlike them your spouse will not be released from liability for these amounts even when discharged from his bankruptcy.

Bankruptcy is now a ready option at times of financial difficulty, and the effect is not as onerous as a one-time. It can have serious implications for the financial settlement on divorce, but with help and advice from an experience family lawyer it need not be a bar to securing a proper financial settlement.

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