Bankruptcy and Divorce

May 4, 2021

Bankruptcy can undermine divorce settlements. bbl family law have the expertise to help.

Debt and bankruptcy are horrid things to go through, and they need to be managed carefully. Bankruptcy 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 reaching a 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, in past cases the Court of Appeal has 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 (even though 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 allowed the wife to keep the home.

Another approach is to question the validity of the bankruptcy. If the Court finds someone has deliberately made himself bankrupt, to avoid making a settlement, the courts can annul (or cancel) the bankruptcy and allow 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.