Divorce – what if your ex goes bankrupt?

Year Published: 2013

Nearly 26,030 people went bankrupt between July and September 2013, the highest figure in 12 months.  Just imagine you’ve been through a marriage breakdown but then you face sorting out the money, your ex is being extremely cagey and then goes bankrupt!  What next?

All is not necessarily lost.  Each case will need to be judged on its merits and a lot will depend on the timing of the bankruptcy.  In many cases an application for a financial order will be most effective if it is undertaken quickly.

The family court still has the power to order the following:

  1. Lump sums only to be taken from the residue of the estate following the discharge of the bankruptcy, however this could take time;
  2. Pension sharing or attachment orders, as pensions fall outside the reach of the bankrupt’s estate;
  3. Periodical payments known more commonly as maintenance – although the assessment of amount payable by the family court is not binding on the bankruptcy court and so could be changed;
  4. Debts arising from family proceedings, such as costs orders. Child Support Agency payments are not automatically erased by discharge from bankruptcy;
  5. That the bankruptcy is set aside, for example, if you believe that your ex is not truly insolvent.

The court does not necessarily have the power to make a property adjustment order except to order a payment from the residue of proceeds of sale.

As noted above, the court has the power to set aside the bankruptcy, if successful this would allow the court the full range of powers for distributing assets. The bankruptcy may be annulled if it appears to the court, at the time the order was made, that the order ought not to have been made.  The court will examine a range of factors in making the decision. If for example, it can be proven by the person making the application that the bankruptcy was tactical, then this could be a significant factor for the court.  Again, timing is going to be essential.   Any such applications to the court are going to be costly and consideration will need to be given to the potential benefits against the costs.  It is likely that the court will order that the trustee in bankruptcy’s costs will be paid out of the estate before any money is passed onto a spouse seeking financial relief, which could eat into the funds available for distribution.

Bankruptcy after financial order

In the instance that bankruptcy occurs immediately after finances have been ordered then the bankrupt will not be released from their obligations for periodical payments, although the amount payable may be open to variation and that includes any arrears.  They similarly may not automatically escape payment of lump sums and costs orders although due to an amendment to the law this only applies to bankruptcies commencing after 1 April 2005.  As noted above pension sharing and attachment orders will fall outside of the bankrupt’s estate so can still be implemented.

Finally, careful consideration should be given to any property owned and the matrimonial home. In some cases, depending on the circumstances, the trustee in bankruptcy may try to argue that the property has been transferred at an undervalue and seek to overturn the order in relation to the property.  This application could extend as far as five years after the transfer.  In the instance of a party having a deferred interest in a property, for example to allow you to remain until the children leave full time education, the trustee in bankruptcy can apply for sale of the house before any trigger factors apply, so remaining in the house could be much more risky than agreeing an order for sale and accepting a capital sum following sale.

If it appears that bankruptcy is likely or if it has happened in a separation, seeking immediate and expert advice is essential, please contact a member of our Family team on 0161 475 7676.

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