The overlap between bankruptcy and divorce

The overlap between bankruptcy and divorce

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Relationship breakdown resulting in a divorce and civil partnership dissolution is very tough.

Managing debt and the risk of, or actual, bankruptcy at the same time, even more so.

Bankruptcy – and its effect on your family if you are getting divorced or already divorced – is complicated. Bankruptcy has a drastic effect on divorce financial settlements. 

We unlock the answers to frequently asked questions and provide a general overview, but bespoke, tailored advice to your situation must always be taken. Early legal advice will prove invaluable, when navigating a situation where finances can be fragile.

This article explains what bankruptcy is.

An overview of bankruptcy

What is bankruptcy?

Bankruptcy provides one mechanism for individuals to deal with debts they cannot pay. It does not apply to companies or partnerships. The bankruptcy process aims to share your assets amongst your creditors, and whilst it is considered a last resort it allows the bankrupt to make a fresh start without any debt after a period of time. The bankrupt is under a duty to cooperate with the appointed trustee in bankruptcy.

Who can apply for bankruptcy?

You can apply to make yourself bankrupt, or a creditor who is owed at least £5,000 can petition for you to be made bankrupt. Creditors can apply jointly so the total debt owed is above the bankruptcy threshold of £5,000.

How do you get made bankrupt?

The process for bankruptcy is:

  • correspondence/invoices from the creditor(s), requesting the monies owed
  • service of a statutory demand, which is a formal legal notice served by a creditor claiming a debt to be due. Where possible, it should be personally served. If you wish to challenge the statutory demand you should seek advice to consider whether you have grounds to set the demand aside. You will have 18 days from the deemed date of service to file an application at court seeking to set it aside
  • from 21 days after service of the statutory demand, a creditor can petition for your bankruptcy by way of a bankruptcy petition. A search will be carried out beforehand to check whether any other bankruptcy petitions have been issued. The bankruptcy petition will be stamped with a court stamp and a hearing date fixed. The bankruptcy petition must be personally served at least 14 days before the date of the bankruptcy hearing
  • at the bankruptcy hearing the court will determine whether a bankruptcy order should be made.

Who is the trustee in bankruptcy?

The trustee in bankruptcy is appointed on the making of a bankruptcy order. The trustee in bankruptcy could be the Official Receiver or an insolvency practitioner.

How are debts dealt with by the trustee in bankruptcy?

One of the primary responsibilities of the trustee in bankruptcy is taking control of the assets of the bankrupt and realising/selling their assets and distributing and apportioning these funds in proportion to the debts due to each of their creditors, who may or may not receive the full amount of money owed to them. The trustee in bankruptcy will gather information to review and adjudicate any creditor claims. In the event that a dividend is to be paid to creditors, the expenses and costs of the bankruptcy will be paid first, then preferential creditors and finally ordinary creditors.

What happens to assets that are jointly owned with someone else?

When an asset is owned jointly by the party who has been declared bankrupt by way of a bankruptcy order, or against whom a bankruptcy petition has been issued, and a third party – whether a family member, spouse or other - the property or asset cannot be transferred to the co-owners without the consent of the trustee in bankruptcy who is dealing with the bankrupt’s estate.
The bankrupt’s estate vests automatically in the trustee in bankruptcy without the need for any conveyance of assignment, (section 306 Insolvency Act 1986). Bankruptcy will automatically sever a joint tenancy and only the bankrupt’s beneficial interest vests in the trustee in bankruptcy, (the legal title does not change). The trustee in bankruptcy will want to realise the bankrupt’s interest in any jointly owned property as soon as possible, and within three years. 
The trustee in bankruptcy cannot take the co-owner’s share to satisfy your creditors. You should contact the trustee in bankruptcy as soon as possible to discuss available options.

How long does a bankruptcy order last?


Usually 12 months, unless it is extended by the trustee in bankruptcy, (for example, if you have not fully cooperated with the trustee in bankruptcy or found to be dishonest).

How do you find out if a bankruptcy petition or order has been made?


An insolvency and bankruptcy notice must be placed in the Official Public Record, the Gazette.

You can search the Individual Insolvency Register on the Government’s website.

If you are the bankrupt, your bank account may be frozen and you will have been served with bankruptcy court papers.

 

An overview of financial settlements on divorce and civil partnership dissolution

On a divorce or dissolution of a civil partnership, both parties are entitled to a reasonable and fair financial settlement which is determined with reference to the resources available to the family.

In every case, it is strongly advised to obtain a financial order to reflect the terms of the settlement. For more information about the issues to consider, which are set out in S25 Matrimonial Causes Act 1973, the orders that can be made, and why is it always important to obtain an order, see What is a financial order on divorce and dissolution? | Weightmans . If there is the risk of bankruptcy, obtaining an order to record your settlement is crucial.

The impact of bankruptcy on a financial settlement

Bankruptcy can be financially devastating. It may mean that the resources available to provide for a financial settlement are reduced significantly, 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.

For more information see here.

Shevy Narendra is a Principal Associate 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).

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Photo of Shevy Narendra

Shevy Narendra

Principal Associate

Shevy specialises in all aspects of contentious insolvency (personal and corporate) acting for both defendants and claimants in the UK and abroad.

Photo of Fiona Turner

Fiona Turner

Partner

Fiona joined Weightmans' family law team in 2015 as a partner with over 20 years' experience dealing exclusively with family law issues. Having practised in London with leading and innovative family law firms before relocating to Manchester, Fiona deals with matters for clients wherever they are based – whether in the North West, London or elsewhere in the UK and abroad.

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