Bankruptcy and Divorce

 

In the current economic climate, debt and bankruptcy are increasingly common. They have serious effects and can undermine any financial settlement imposed by the court. This can have devastating consequences for the family involved. The risk of bankruptcy in the future must be considered when arriving at a financial settlement, and it is crucial to take specialist advice, and to act as soon as possible.

Different problems occur if a spouse is made bankrupt before or after a divorce settlement.

If the bankruptcy occurs before a divorce, the assets of the bankrupt belong to his or her trustee in bankruptcy. This includes their share of the family home, and the trustee may want the house sold to help reduce the debts. Sometimes it is possible to gain some breathing space. Inevitably there is less money available within the divorce proceedings for a settlement. However, recent changes to the law mean money owed to the non bankrupt spouse as part of the settlement can survive bankruptcy, i.e. the debt is not wiped out. Also, the bankrupt is still liable to pay maintenance.

If a person is made bankrupt after a divorce settlement, the trustee in bankruptcy may have the power to look back in time and undo transfers to the non-bankrupt spouse, even if they were made following a court order. However, recently the Court of Appeal (in the case of Hill v Haines 2007) found against a trustee in bankruptcy who wanted to reverse a divorce settlement which allowed the wife to keep the family home in return for a “clean break” settlement. Although the High Court initially found the trustee was entitled to force a sale of the house (and that he was entitled to a share of the proceeds), this was overturned and ultimately the court allowed the wife to keep the home.

Another approach is to question the validity of the bankruptcy. This approach was successful in a Court of Appeal decision earlier this year, Paulin v Paulin 2009. The court found a husband had chosen to make himself bankrupt, to avoid having to make a settlement to his wife, despite being apparently wealthy. The courts annulled (or cancelled) the bankruptcy and allowed the wife to make her claims.

We at bbl family law have the experience and knowledge to protect your position as best as is possible, both now and in the future.