How does bankruptcy affect a divorce settlement?

Bankruptcy, or the threat of bankruptcy, is a common factor in divorce cases, but what effect can it have upon the financial settlement?

The basic mechanics of bankruptcy are that when a person can’t pay their debts, then they or their creditors may apply to a court for them to be made bankrupt. After a person is made bankrupt, their property (but not any pensions) will pass to their ‘trustee in bankruptcy’, who will use it to pay off the bankrupt’s creditors. The bankrupt’s spouse will not therefore be able to pursue a claim against the property of the bankrupt that has passed to the trustee.

It should be noted that only the property belonging to the bankrupt passes to the trustee. Property belonging to the bankrupt’s spouse does not pass to the trustee. Accordingly if, for example, the former matrimonial home is owned jointly, then only the share of the bankrupt spouse will pass to the trustee.

However, the trustee can apply to a court for the property to be sold and, provided that one year has elapsed from the date of the bankruptcy, the court will normally order a sale, unless there are exceptional circumstances. Of course, when the sale goes through the non-bankrupt spouse will receive their share of the proceeds, but this may not be enough to re-house themselves and any children.

What if the property has already been transferred to the non-bankrupt spouse? The trustee can apply to set aside any transfer made within five years before the bankruptcy. However, a transfer will not normally be set aside if it made pursuant to a divorce court order.

Lastly, note that where one party makes themselves bankrupt purely to defeat the other party’s financial claim on divorce, the court can annul the bankruptcy.

Obviously, bankruptcy can be a complex area, and the above is only a brief introduction. If you are concerned that it could be a factor in your divorce then you should seek expert legal advice as soon as possible. Family Law Café can help you find this. To contact us click the Contact link above and fill in the form, or call us on 020 3904 0506.

Image: Injured Piggy Bank With Crutches, by Ken Teegardin, licensed under CC BY 2.0.