Has your spouse gone bankrupt during the divorce?

My husband is made bankrupt during the divorce

Bankruptcy is one way to deal with your financial situation, that is,  if you have debts which you are unable to pay. There are various articles on our website which provide some detailed information about the ways in which bankruptcy can filed and the whole process.

This article deals with what is likely happen if the person going bankrupt is also going through divorce and is in the process of reaching a financial settlement with his or her spouse. Each case is different and will have a different set of circumstances.

There will be a conflict of interest between creditors and the spouse when it comes to dividing the assets of the bankrupt. When it comes to bankruptcy and divorce the family home is often a major concern, as is the possibility that some spouses may use their status as a bankrupt to frustrate any financial claim against them by their estranged spouse. Bankruptcy during divorce will also lead to practical difficulties when it comes to enforcing lump sum orders and maintenance orders.

Will I have to leave the family home after the divorce?

The family home in most cases will be the only asset in the bankruptcy which means the trustee in bankruptcy will be keen to realise the interest through selling the property and dividing the proceeds among the bankrupt spouse’s creditors.

Under the Insolvency Act 1986 a trustee in bankruptcy can only enforce a court order to sell a family home after 12 months (unless the court thinks it is reasonable to proceed with a sale). This gives spouses an opportunity to make alternative living arrangements while remaining in the family home.

Where the family home is jointly owned the bankrupt spouse’s share cannot be put into the non-bankrupt spouse’s name without the agreement of the trustee in bankruptcy. The trustee is unlikely to agree as they have a duty first to the creditors who are owed money in the bankruptcy.

When the family home is owned solely by the bankrupt spouse, it is essential to act quickly to avoid the sale of the property by the trustee. 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.

Can I claim the pension in the bankruptcy?

If the pension is held in a certain unapproved pension scheme, then it is not included as an asset in the bankruptcy. In most cases the Judge can make orders relating to the pension.

When a spouse uses bankruptcy as an excuse to reduce the financial settlement

Sometimes a spouse will use bankruptcy to prevent an estranged spouse’s financial claim against him or her. If this happens, then it’s possible for the non-bankrupt spouse to ask the court to set aside the bankruptcy proceedings as an abuse of process (The Insolvency Act 1986 s 282). The question the court will ask is whether the bankruptcy order should have been made in the first place.

There was case of Paulin v Paulin (2009) where the court overturned the bankruptcy proceedings when a husband created a fabricated debt so that he can file for bankruptcy as his only intention (it was found) was to reduce the amount of money the wife would get in divorce proceedings.

It is important that you take immediate advice if you have any suspicions that there may be some foul play. Reaching a settlement before the bankruptcy is always the better way to deal with things in a way that it is not later challenged by the trustee in bankruptcy.

There are too many complications when dealing with bankruptcy and divorce and so taking advice should be a priority!

These are some of the issues and complexities that arise in relation to bankruptcy and divorce. It is important to take independent advice.

Next Steps

If you want to find out anything further about this topic then please feel free to call on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email vee@navigatebr.com

This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising because of any person or organisation acting or refraining from acting on any information.