Often the bankruptcy is genuine where the debts are so high that there is simply no alternative.

Whatever the situation, the bankruptcy of one spouse in a marriage is likely to have serious financial, and lifestyle, consequences on the other.  Almost all the assets of the bankrupt will be owned by a Trustee in Bankruptcy thus reducing the pot of matrimonial assets significantly.

The major assets of most married couples, the family home, if owned jointly (or solely by the bankrupt) will be at risk of sale unless the bankrupt’s spouse is in a position to purchase the bankrupt’s share at a reasonable market value which is often not feasible.  The only “comfort” in that situation is that the Trustee will generally agree to defer the sale for a period of 12 months after the bankruptcy order is made.

Further, since the bankrupt’s savings and income will be controlled by the Trustee to discharge debts, it is unlikely that a payment of a lump sum or maintenance (other than possible at a minimal level at best) will be possible.  Although the Trustee cannot touch a government approved pension so far as the fund is concerned, any income from that pension would be vulnerable.

However, it is hard to believe that some spouses choose to file for bankruptcy in order to delay or defeat their spouse’s claims for a financial settlement, a cynical ploy which would only serve to increase the bitterness between the parties on divorce.

However, bankruptcy does not carry with it the social stigma that it once had, and bankrupts will usually be discharged from the bankruptcy after one year enabling them, potentially, the opportunity to rebuild their lives.  To that extent therefore perhaps a cynical spouse may be more encouraged nowadays to file for bankruptcy.

Divorce and Bankruptcy – What can be done to protect the other party?

 Firstly, what not to do:

  • As you may expect, any agreement made between spouses (ratified in a consent order in the financial proceedings prior to a bankruptcy order being made) as a deliberate attempt to defeat a Trustee’s claim is very likely to be set aside.
  • Further, attempts to protect assets from the claim of a Trustee by deception are likely to fail, such as in the recent case of
    1. Thandi v Sands [2014] EWHC 2378 (Ch) whereby the father (Mr Thandi) claimed that 16 properties registered in the name of his son Mr Singh were in fact his under a deed of trust allegedly signed between the parties in 2003.  He applied to court for an order against the Trustees of his son (made bankrupt in 2011) to have the properties released to him from the bankruptcy.  He failed.  The court found that Mr Singh had previously claimed ownership of the properties when applying for a mortgage and in tax returns submitted to the HMRC, and the deed had in fact been signed in 2006 and backdated as a ploy.

Secondly, what to do:

  • It is very important to act quickly once the possibility of a bankruptcy is sign posted.  A prompt application to court for a financial order may result in an order being made which could ring fence assets and provide for maintenance to be paid at a reasonable level.  However, in certain circumstances the Trustee could apply for to have certain parts of the order set aside.  Much depends on the facts of the case, but having the order is certainly better than not having one at all and it would potentially minimize the impact of the bankruptcy on the bankrupt’s spouse, and any children – and would in the usual course of events continue to be enforceable to be proven as a debt in the bankruptcy, and continue to be an obligation after the bankrupt has been discharged from bankruptcy. 
  • As mentioned already, pension funds do not vest in the Trustee and so it may be possible for the non bankrupt spouse to obtain a pension sharing order through the court in the financial proceedings which transfers the majority, if not all, of the bankrupt’s pension fund into one of their own.
  • It may be possible to apply for the nullity of the bankruptcy order on the basis that it is not a bone fide bankruptcy, that is, there is no genuine insolvency.

Possible concern – costs and the continuity of a financial order

There are two separate and distinct courts and legislation involved here which respectively deal with insolvency and divorce so it is a complicated area of the law to manage.

An example of this is that under the Insolvency Act – a case of “give with one hand” but potentially “take it away with the other”.

S.281 (5) states that the bankrupt shall not be discharged from any order made in family proceedings or under a maintenance calculation under the Child Support Act 1991.

This would also include any order for costs made in the family proceedings. All well and good, but someone intent on trying to frustrate or defeat an application by the other spouse for financial relief in divorce may be encouraged to file for bankruptcy armed with this knowledge.  However it also demonstrates the importance of the other spouse making an application for financial relief in the family court at the earliest possible date before a bankruptcy petition is filed.

The potential problem is however that this section of the Act also provides the court with discretion to release the bankrupts from their obligations under family proceedings orders and on such conditions as the court may direct.  This could encourage former bankrupts to throw themselves on the mercy of the court to be released from such obligations to their families.

However, thankfully for those with the benefit of financial orders in divorce, in the case of Hayes v Hayes [2014] EWCH 2694 (Ch), the judge on appeal refused to allow the release of the former bankrupt Mr Hayes from a cost order made in divorce and financial proceedings.  The outcome augers well for the protection of family proceedings orders, since this case remains the leading case on this matter for a number of years.

If you would like advice on divorce and bankruptcy a very complex area of family law contact Anita Garside on 01636 594460 or email anita.garside@ringroselaw.co.uk

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