Bankruptcy can be financially devastating — and even more so if there is a relationship breakdown. It may mean that the resources available to provide for a divorce or dissolution financial settlement are significantly reduced, and/or that a financial deal that the parties strike together is vulnerable to attack by the trustee in bankruptcy. It can also result in historical financial transactions being unwound or set aside.
Below are some key issues to consider:
Does it matter who issued the bankruptcy petition?
If the court finds someone has deliberately made themselves bankrupt to avoid making a financial settlement on divorce or dissolution, the court has power to annul (or cancel) the bankruptcy which will allow the spouse to proceed with their claims.
Timing matters
Timing is everything.
As a whole, a non-bankrupt’s spouse will only succeed in securing a divorce financial settlement if a financial remedy court order and the divorce proceedings have been concluded before a bankruptcy order has been made, although in some cases it may be set aside. See below.
If you believe that your spouse may be facing bankruptcy, the timing of a bankruptcy petition and order can be crucial to your outcome. Seek urgent legal action to check your position.
The bankrupt may still be liable to pay maintenance if appropriate, (although note that not all their income may be available/some may be allocated to the trustee).
Pension sharing orders can still be made by the family court, (although note that pensions in payment may be treated differently if income is allocated to the trustee).
Bankruptcy will also remain on your credit history for six years which will affect future financial dealings in addition to making it challenging to obtain credit.
The bankrupt may lose their business. If you are made bankrupt, you will have to resign as a director of any limited company.
The non-bankrupt party may be able to keep what is in their own name, but once a trustee in bankruptcy is appointed, the trustee has the power to potentially recover gifts made to them, and to deal with jointly owned assets. The trustee in bankruptcy will also have the power to financially unpick transactions, particularly if assets have been transferred at an undervalue as we explain below.
What happens if a bankruptcy petition is filed after a financial settlement is reached?
A divorce financial settlement may be negotiated between the parties or imposed by a court. In either situation, a financial settlement should be recorded in a financial court order.
Obtaining a financial order if there is a risk of bankruptcy is vital for the reasons explained below.
Before a bankruptcy petition is filed, a financial settlement can be reached in the usual way. Debts will be taken into account in the negotiations.
Provided that the person is made bankrupt after a financial settlement is
- made into a court order — and
- the final order of divorce (previously called a decree absolute) has been granted
the order is binding on the trustee, (save for in the situations outlined below).
If the agreement has not been made into a financial order, or the agreement has been made into a financial order but the final order of divorce has not yet been made before the bankruptcy order made, the settlement is not binding on the trustee.
However, if the agreement has been negotiated between the parties at length, usually with legal advice and if it has been sealed by the court, the trustee will give careful consideration to whether it is appropriate to disregard the proposed division of assets.
Can a financial court order, after final order of divorce, be ripped up and set aside?
Yes — if there is evidence of collusion or fraud, mistake or misrepresentation, or if a transfer was made at an undervalue.
Likewise, if your spouse knew at the time of the financial order being made that they were insolvent.
What can the trustee in bankruptcy do?
The trustee in bankruptcy may have the power to look back in time and undo transfers to the non-bankrupt spouse, even if they were made following a court order.
A trustee in bankruptcy has the ability to set aside or void any dispositions made between spouses five years prior to the bankruptcy and also during the bankruptcy period, (from the date of the bankruptcy order to the bankrupt’s discharge), if considered to be a sham or at an undervalue.
What information can the trustee obtain?
Parties in family proceedings need the family court’s express permission to share documents from the family court proceedings with a third party, such as a trustee in bankruptcy.
The trustee in bankruptcy has the power to obtain full details of a financial settlement agreed in divorce. However, the permission of the court is required, which has discretion to permit an order to be made. In any event, the bankrupt spouse will have an ongoing duty of cooperation with the trustee in bankruptcy.
What happens if your spouse is made bankrupt but they still owe you money under the terms of your divorce settlement?
Your settlement may have been reached and recorded in a court order some time ago, your divorce finalised, but your former spouse is obliged to provide you with resources as part of your deal and hasn’t yet paid them. You might be entitled to a cash lump sum or other resource.
Lump-sum orders, (an order that one party pay a certain amount to another), are a provable debt in a person’s bankruptcy, meaning that the former spouse becomes an unsecured creditor and will be entitled to participate in any distribution of the bankrupt’s estate although, like other creditors, they may not always receive the full amount they were due. However, it may still be possible to pursue any balance due after the bankruptcy order is discharged.
Maintenance might also still be payable, although it may be reviewed.
Can you be made to sell your house if you continue to live there?
Yes, usually, the trustee in bankruptcy will apply to court after the first anniversary of the bankruptcy order for a court order to sell a family home, (unless the court thinks it’s reasonable to proceed with a sale before then). This gives spouses an opportunity to make alternative living arrangements while remaining in the family home.
The trustee in bankruptcy will have three years for an order for sale of a family home. The court has discretion to make any order which is just and reasonable in relation to postponing the sale of a family home, however it will only do so in exceptional circumstances.
When the family home is owned solely by the bankrupt spouse, it’s essential to act quickly to avoid the early sale of the property by the trustee in bankruptcy, subject to our comments above. Under the Family Law Act 1996, a non-owning spouse has a right to occupy the property but he or she must register these rights at the Land Registry to be able to enforce them against the trustee. Once the rights have been registered the trustee will be unable to sell the home without the express consent of the non-owning spouse or a court order.
If the family home is in the sole name of the non-bankrupt party, then it is likely not to be captured by the bankruptcy process and will remain out of reach of the trustee in bankruptcy.
Summary
The key take-aways if you are facing the risk of bankruptcy and divorce or dissolution are:
- seek early expert legal advice — divorce and bankruptcy are complex legal matters
- timing is critical — when to separate or divorce should be carefully considered before decisions are taken. Urgent advice may be required. If there is a risk of bankruptcy, establish as soon as possible at what stage the bankruptcy process is
- contact the trustee in bankruptcy: if one has been appointed, update them on the position, and obtain information including the number of creditors and consider what the interests are from property/trust angle. Do not carry on divorce proceedings unless the trustee in bankruptcy agrees
- consider if the bankruptcy order was legitimately made.
Shevy Narendra is a Principal Associate Solicitor who specialises in all aspects of contentious insolvency (personal and corporate) acting for both defendants and claimants in the UK and abroad. She has a strong track record in defending director disqualification claims by the Insolvency Service on behalf of the Secretary of State.
Fiona Turner is a Partner dealing exclusively with family law issues. Her main practice areas include advising on wealth protection strategies (including pre and post nuptial agreements and cohabitation agreements); divorce and dissolution (including international issues), and financial settlements for married and unmarried couples (often involving businesses, land (including farms), trusts and pensions).
If you need further guidance on bankruptcy or insolvency, contact our restructuring and insolvency lawyers.
For support with navigating divorce proceedings, contact our divorce solicitors.
