Henry Brookman discusses what happens when a spouse is declared bankrupt during or after a divorce. Published in Moneyhighstreet.com.

One of Britain’s biggest divorce cases between property tycoon Scot Young and his wife Michelle has gained significant coverage in recent weeks. This is due to Mr Young declaring himself bankrupt during divorce proceedings, leaving his wife struggling to prove otherwise. Though this is a higher profile case than most, the issues can apply to any divorce where one party declares themselves bankrupt.

What happens when bankruptcy strikes during a divorce?

In many cases, the non-bankrupt spouse finds out about their partner’s insolvency when the bailiffs arrive to take possession. The bankrupt spouse may have been concealing their financial problems in the hope that a solution presents itself. In some situations, bankruptcy can be the reason for the divorce, but whatever the cause, it is likely to mean both parties will lose out financially.

For the non-bankrupt spouse, issuing divorce proceedings and seeking financial settlement will not separate their needs from other creditors. In fact, their divorce settlement will come second to paying off creditors.

In some cases, the partner that is slipping into bankruptcy will try to rapidly conclude a settlement with their spouse so at least they are financially looked after. However, transactions designed to favour one creditor over another are deemed a ‘preference’ and are invalid. In exceptional cases it may be possible to show the transaction was not a preference, but this is difficult. If however, the bankruptcy does not happen for six months, the preference provision no longer applies and the settlement may then be valid.

How is the home accounted for during bankruptcy?

If the home is solely in the name of the person declared bankrupt, the non-bankrupt partner is in a fairly desperate position. One year’s occupation will be afforded to the non-bankrupt spouse, but at the end of that time, the trustee can take possession of the property to sell it to pay creditors. If the property was in joint names, then the asset will be split. The home will be sold in due course, but at least half can be ring-fenced from the creditors.

How are you financially supported during bankruptcy and divorce?

Even during bankruptcy, some maintenance can be made available to the bankrupt partner and their family, even though it will be less than the prior standard of living that the family enjoyed. However, the court has the power to annul the bankruptcy if the bankrupt spouse is found to be deliberately understating their assets. Proving this can be difficult and costly, and involves the non-bankrupt spouse having to establish that the partner’s assets exceed their liabilities.

The alternative to bankruptcy

Individual voluntary arrangements are a popular alternative to bankruptcy. In that case the, non-bankrupt spouse will be involved in a three-way negotiation with her partner and the other creditors to agree settlements. This can provide a more certain outcome than being subject to the rigours of bankruptcy law.

If you are unsure about how bankruptcy might affect your divorce, please contact Brookman Solicitors for more advice.

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