The financial aspects of a relationship can be among the most complex and emotionally charged elements to navigate during a divorce. When one partner declares bankruptcy, the process becomes significantly more complicated, particularly when dividing assets, determining financial responsibilities, and resolving disputes over liabilities. In England & Wales, where insolvency law and family law intersect, the implications of bankruptcy on divorce settlements can be far-reaching. Understanding these complexities is crucial for ensuring a fair outcome while safeguarding the financial interests of both parties.
The Legal Framework Governing Bankruptcy and Divorce
In England & Wales, bankruptcy is primarily governed by the Insolvency Act 1986. When a person is declared bankrupt, their financial affairs are placed under the control of a trustee in bankruptcy, who is responsible for realising assets to repay creditors. At the same time, divorce settlements fall under the jurisdiction of the Matrimonial Causes Act 1973, governing how assets are split between spouses.
These two legal frameworks can sometimes conflict, as family law seeks to achieve fairness between separating spouses, while insolvency law prioritises creditors. This dynamic can lead to uncertainty, particularly when bankruptcy occurs before or during divorce proceedings.
How Bankruptcy Affects the Division of Assets
During divorce proceedings, the division of assets typically aims to achieve a fair and equitable settlement. However, if one partner declares bankruptcy, their assets, including property, savings, and other financial interests, are effectively frozen and transferred to the trustee in bankruptcy. This can significantly affect the availability of assets for distribution in a financial settlement.
The Impact on the Family Home
The family home is often the most valuable asset in a marriage, and ownership disputes can be contentious in a divorce settlement. If a bankrupt spouse jointly owns the property with their partner, the trustee may seek to sell the home to settle debts. While the non-bankrupt spouse may have a claim to their share of the equity, the interests of creditors often take precedence.
That said, the non-bankrupt partner may be able to argue that selling the home would cause undue hardship, particularly if children are involved. The trustee does have some discretion, and in certain cases, the sale may be delayed to allow the non-bankrupt spouse time to reorganise their finances. However, if there is substantial equity in the property, the likelihood of a forced sale increases.
Other Shared Assets and Savings
If spouses have joint savings, bank accounts, or investments, the share belonging to the bankrupt individual will typically be claimed by the trustee. Assets held in one partner’s sole name could also be subject to scrutiny, particularly if the individual transferring funds between accounts seeks to protect their wealth before bankruptcy. The court has the power to overturn transactions that are considered to be attempts to defraud creditors.
Maintenance Payments and Financial Orders
Divorce settlements often include financial orders that require one party to make ongoing payments to their spouse or children. However, when bankruptcy is involved, the ability to enforce these financial orders can become complicated.
Spousal Maintenance
Spousal maintenance is generally treated as a personal obligation, meaning it is not automatically cancelled by bankruptcy. The recipient of maintenance can still pursue payments even after the payer has become insolvent. However, if the paying spouse lacks sufficient income or assets to continue making payments, enforcement may become difficult. Courts do have the authority to vary or alter maintenance orders depending on changes in financial circumstances.
Child Maintenance
Unlike other financial obligations, child maintenance is generally prioritised over other debts in bankruptcy proceedings. The court will always consider the best interests of the child, and the parent responsible for making payments cannot simply eliminate their obligations due to insolvency. While bankruptcy might reduce the payer’s income in the short term, child maintenance arrears are not written off, and the receiving parent has avenues to enforce payments even after the bankruptcy order is made.
Timing of Bankruptcy in Relation to Divorce Proceedings
The timing of a bankruptcy declaration in relation to divorce proceedings plays a crucial role in determining how financial settlements are affected.
Bankruptcy Before Divorce
If bankruptcy occurs before divorce proceedings begin, the marital assets may already have been transferred to the trustee in bankruptcy. This means that the spouse seeking financial settlement could find they are left with significantly less than they anticipated. Because the court will prioritise existing debts over new claims from a divorcing spouse, it may limit the available assets for a fair settlement.
However, in some cases, if a person deliberately declares bankruptcy to avoid financial obligations in a divorce, the court has the discretion to investigate such actions and potentially reverse improper transactions.
Bankruptcy During Divorce
Declaring bankruptcy during an ongoing divorce can complicate proceedings significantly. Any financial settlement may need to be reassessed in light of the bankrupt party’s financial status. In some cases, the court may adjourn financial proceedings until the conclusion of the bankruptcy so that a clearer picture of the financial situation emerges.
Bankruptcy After Divorce Settlements
Often, a financially weaker spouse will rely on lump sum payments or periodic payments as part of the financial settlement. However, if the paying spouse is declared bankrupt after the settlement has been finalised, they may attempt to have the obligations discharged.
While lump sum payments and property transfers are treated as debts in some instances, courts generally try to protect the non-bankrupt spouse by upholding financial agreements reached during divorce. If it is found that a former spouse intentionally took on excessive debt to escape payments, remedies may be available to ensure fairness.
Can a Spouse Challenge Bankruptcy?
In some cases, a spouse may challenge the other party’s bankruptcy if they suspect it has been undertaken fraudulently or solely to avoid financial obligations related to the divorce settlement. A court may investigate whether the bankruptcy was legitimate or whether assets were deliberately concealed or transferred before insolvency proceedings. If there is evidence of wrongdoing, transactions may be reversed, and a more equitable division of assets may be enforced.
Additionally, if the bankruptcy is disputed, a spouse can make an application to annul the bankruptcy order. However, this requires proving that the bankruptcy was inappropriate, often involving legal action and significant financial and emotional costs.
Protecting the Non-Bankrupt Spouse’s Interests
If one partner faces financial difficulty, there are proactive steps that the non-bankrupt spouse can take to protect their own financial interests.
Legal Advice and Financial Planning
Seeking independent legal and financial advice early in the process can help a spouse take necessary precautions to safeguard their assets. Understanding how assets are shared, separated, or at risk in a bankruptcy scenario is critical to preparing a sound legal strategy.
Negotiating Financial Settlements
If bankruptcy is anticipated during divorce negotiations, it may be worthwhile to consider structuring settlements in a way that protects critical financial obligations. For example, prioritising spousal maintenance over a lump sum payment may provide greater long-term security if other assets become unavailable due to insolvency.
Applying for Court Orders
A spouse potentially affected by their partner’s bankruptcy can seek court intervention to secure urgent orders that prevent the dissipation of assets or challenge illegitimate transactions. Legal remedies such as freezing orders and injunctions may be available to protect their financial interests.
Conclusion
Dealing with financial matters during divorce is challenging enough on its own, but when one partner faces bankruptcy, the situation becomes even more complex. The intersection between insolvency law and family law in England & Wales naturally creates conflicts that can affect the division of assets, financial orders, and future financial stability.
While bankruptcy prioritises the interests of creditors, family courts have the discretion to ensure that divorce settlements remain fair and reasonable. However, delays, legal complexities, and reduced available assets often mean that a non-bankrupt spouse may not receive the full financial entitlement they might otherwise have expected.
Seeking legal guidance early, understanding obligations, and taking proactive steps to secure financial interests are critical in navigating the complexities that arise when bankruptcy affects a divorce settlement. For spouses facing these challenges, remaining informed and prepared ensures the best possible outcome in what is already a difficult and emotional process.