Impact Of Bankruptcy On Divorce Proceedings l Family Law Blog l Nelsons

divorce and bankruptcy have been two big topics in recent times but what happens when these two, already stressful, situations happen at the same time?

Below, we outline the impact that bankruptcy has on divorce proceedings and the issues that can occur as a result.

Bankruptcy

Bankruptcy is one way for individuals to deal with debts they cannot pay. The process makes sure that your assets are shared amongst those you owe money to and lets you make a fresh start free from debt.

You can apply to make yourself bankrupt or an application can be made by a third party, normally a creditor.

If a bankruptcy order is made, the trustee in bankruptcy will be responsible for realising/selling your assets and apportioning them to your creditors.

What is the process of divorce and bankruptcy?

When a property or any other type of asset is owned jointly by a divorcing couple and one of the parties has been declared bankrupt, the property or asset cannot be transferred to the other party as part of the financial settlement in the divorce proceedings without the consent of the trustee who is dealing with the bankruptcy.

The trustee is responsible for handling all the assets and income of the party that has been declared bankrupt. They deal with the assets in a variety of ways in order to pay the creditors of the bankrupted party. This will be the main consideration of the trustee.

What happens if one party is declared bankrupt during a divorce?

What happens with regard to the division of assets on divorce depends largely on whether and when the bankruptcy petition has been filed. Before a bankruptcy petition is filed, the Court retains its full power and discretion concerning finances and divorce. For example, debts need to be taken into account and consideration should be given to options such as negotiating a reduced lump sum towards the debt or instalments to repay the debt and financial orders are binding upon trustees in bankruptcy

Thought should also be given to the financial position if a party is made bankrupt. This is particularly the case if the debt is in one party’s name and is more than the value of the assets in their name or joint names. Sometimes, bankruptcy is the best option as it addresses the debt while preserving what is left of the matrimonial assets.

Ideally, an agreement will be reached as to a division of the assets, but, if the parties are unable to reach an agreement, the Court may make a final order in financial remedy proceedings. This can result in an unequal division of the matrimonial assets if, for example, it is necessary to meet needs. If that order provides for a property to be transferred to a spouse, either outright or on the basis that it will be subject to a chargeback payable at some point in the future, that order will take effect upon pronouncement of decree absolute, the final order that concludes the divorce process.

The impact of a bankruptcy order

Once the bankruptcy order is made, the Court has no jurisdiction to make a subsequent property adjustment order transferring or ordering a sale of matrimonial property. If a property adjustment order has already been made but not implemented before the bankruptcy order, it is still binding on the trustee, as long as the decree absolute has been pronounced to make the order effective under section 24(3) of the Matrimonial Causes Act (MCA) 1973.

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 a spouse can prove in the bankruptcy as a creditor and will be entitled to participate in any distribution of the bankruptcy estate. Other financial obligations are not provable but survive. The Court does have the discretion to release a party from lump-sum obligations post-bankruptcy under section 281(5) of the Insolvency Act, which it may do in circumstances where there is no likelihood of satisfying it. For example, if there is a lapse of time since the order was made and where it may be used as a source of harassment to the discharged bankrupt.

Financial provision and property adjustment orders under the MCA 1973 are valuable rights conferred and recognised by law, whereby one spouse will give and the other will receive consideration. A negotiated agreement to settle an application for financial provision is not a disposition because it is subject to the Court’s discretion in deciding whether an accord has been reached. The agreement only becomes effective when the order is made. A Court order comprising an application for financial provision and property adjustment is a disposition by the individual and not the Court. The order has the effect of vesting beneficial ownership in the recipient and section 284 will apply if the disposition is at the relevant time.

In the case of Robert v Woodall [2016], the Trustee in bankruptcy sought to set aside a consent order under section 284. A petition was presented against the Husband on 9 March 2009, the consent order was signed on 5 June and approved by the Court on 16 July. The Husband was made bankrupt on 7 July, therefore the Court held that the provisions in the order for periodical payments from the Husband to the Wife and the children were void under section 284.

The right under section 24D of the MCA to apply for financial relief constitutes consideration and, therefore, once a Court has made an order or approved a consent order, the trustee cannot seek to challenge it under section 339 of the Insolvency Act unless there has been collusion or fraud, mistake or misrepresentation.

In the case of Sands v Singh [2016], the Husband bought a property in 2006 for £976,000 and married two years later in 2008. The Husband then spent £200,000 on building work and, apparently, owed a further £913,719 plus VAT. In January 2009, the Husband charged the property to secure a £500,000 loan from his Gather. In July 2009, the Wife instructed divorce lawyers and registered home rights under the family Law Act 1996.

In April 2010, the Husband charged the property in favour of his Sister for the sum of £70,000. A divorce petition was issued on 17 September 2010 with both parties signing a consent order in December 2010. The terms stated that the Husband would put the matrimonial home on trust for the Children, pay £375 per child per month, be responsible for the mortgage, pay a lump sum of £50,000 and have the rights of occupation. The Wife moved into the property and decree absolute was granted in February 2011. £50,000 was received in June 2011 and the Husband was adjudged bankrupt in September 2011.

It was held that the Trustee in bankruptcy had made out his case was a sham as no evidence had been provided that there had ever been a loan; there was no evidence of collusion or that the Husband’s Sister was aware of her Husband’s financial difficulties.

The negotiations took a long time to conclude as the Husband did not agree to the Wife’s proposals immediately. The Court, therefore, could not conclude that a matrimonial Court would not have made the consent order and, as such, that it would be set aside as a transaction at an undervalue.

What happens to the assets?

When a property, or any other type of asset, is owned jointly by a divorcing couple and one of the parties has been declared bankrupt, the property or assets cannot be transferred to the other party as part of the financial settlement arising from the divorce proceedings without the consent of the trustee who is dealing with the bankruptcy.

As long as no bankruptcy petition was filed before the decree absolute, the order will be binding even if the property has not yet been transferred. If the spouse transferring their interest is subsequently adjudged bankrupt, the trustee in bankruptcy is also bound by the order.

If a bankruptcy petition is filed before the decree absolute is pronounced by the Court, then the entirety of the bankrupted party’s estate will rest in the trustee in bankruptcy, and the Court is unable to make a property adjustment order without the validation of the bankruptcy Court.

What about bankruptcy after a divorce settlement?

Subsequent bankruptcy can also cause issues with regard to lump-sum payments that have yet to be paid. While these debts can be sought through bankruptcy, unlike other debts, the spouse is not released if they are not paid when they are discharged from bankruptcy.

Other orders that are made in matrimonial proceedings include pension sharing or attachment orders, which are not affected by bankruptcy, and maintenance but the payer’s ability to pay can be restricted if they are required to pay an element of income to the creditors.

Can the non-bankrupt spouse apply to annul the bankruptcy order?

If the one party made themselves bankrupt on their own petition and it appears that they did so to defeat a family finance order, the other party may, in some circumstances, apply to annul the bankruptcy under section 282 of the IA 1986 on any grounds existing at the time the order was made that mean it shouldn’t have been. The Court may annul a bankruptcy order whether or not the bankrupt has been discharged from bankruptcy.

However, a Court will only be prepared to annul the bankruptcy when it can be shown that the individual was not insolvent on either a cash flow or balance sheet basis at the time of the bankruptcy order. It is immaterial what the motivation was for presenting the petition. The evidential burden of demonstrating insolvency will shift if the other party can show that assets exceed liabilities. The individual will then need to prove they were unable to pay the debts as they fell due.

Don’t forget

When it comes to bankruptcy and divorce, it is important to remember the outcome is dependent on when the bankruptcy and divorce have been filed.

Numerous other factors need to be taken into consideration such as property, matrimonial assets and financial provisions, as well as being able to annul the bankruptcy in certain circumstances.

In an ideal world, divorcing parties should reach a financial settlement before either party is declared bankrupt. However, separation, divorce and the issues concerning breakdown in relationships are often complex. For this reason, it’s always advisable to consult a specialist family solicitor at the earliest opportunity to discuss these matters, take the appropriate advice and necessary action.

 

This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
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