The bankruptcy process is one way to deal with debt you can’t pay. The assets of a bankrupt come under the control of a ‘trustee in bankruptcy’ – usually a solicitor or accountant. The trustee will ordinarily sell assets and give creditors an indication of how much they are likely to receive in discharge of the debt owed to them by the bankrupt.
But what happens if the bankrupt is also going through divorce, and is in the process of reaching a financial settlement with his or her spouse? Clearly there will be a conflict of interest between creditors and the spouse when it comes to apportioning the assets of the bankrupt. With bankruptcy and divorce the ownership of 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.
Does spouse’s bankruptcy mean I have to leave the family home after divorce?
Often the matrimonial home will represent a significant chunk of a bankrupt’s wealth. This 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.
The first thing to note is that under the Insolvency Act 1986 a trustee can only enforce a court order to sell a family home after 12 months (unless the court thinks it’s reasonable to proceed with a sale). This gives spouses an opportunity to make alternative living arrangements while remaining in the family home.
If 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. Given the trustee’s duty to creditors it’s unlikely that such consent would be forthcoming without the spouse being able to pay the market value of the bankrupt spouse’s share.
When the family home is owned solely by the bankrupt spouse, it’s 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 th etrustee. 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 a share of my bankrupt spouse’s pension?
Your spouse’s pension won’t come under the control of the trustee in bankruptcy unless it is held in certain unapproved pension schemes. This means that in most cases judges can make orders relating to the pension even when the pension holder is bankrupt.
My spouse is using bankruptcy as an excuse to reduce my financial settlement
It’s not uncommon for a spouse to declare bankruptcy to frustrate an estranged spouse’s financial claim against him or her. In such a scenario it is possible for the non-bankrupt souse 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 or not the bankruptcy order should have been made in the first place. In the case of Paulin v Paulin (2009) for example, the court overturned bankruptcy proceedings when a husband created a fictitious debt to enable himself to be declared bankrupt with the sole intention of reducing his wife’s financial claim.
If you think your spouse is considering bankruptcy to thwart your financial claims you should seek urgent legal advice. It may be possible to reach agreement on a settlement before the bankruptcy order is finalised. Although your legal advisors should take steps to copper fasten any such agreement so it cannot be challenged by any trustee in bankruptcy appointed once the bankruptcy order is made final.