Divorce and Bankruptcy

The spectre of bankruptcy can sometimes intrude into a divorce.

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The spectre of bankruptcy can sometimes intrude into a divorce.  A spouse may be made bankrupt prior to or during financial remedy proceedings.

A bankruptcy petition can be presented by a creditor but also by the debtor him or herself.  The debtor can try to avoid bankruptcy by entering into an Individual Voluntary Arrangement (IVA) with creditors.

On a bankruptcy order, all of the bankrupt’s assets vest in a ‘trustee in bankruptcy’, who is likely to be an insolvency practitioner and who is required to realise the bankrupt’s assets for the benefit of the creditors. The trustee in bankruptcy takes possession of the bankrupt’s assets in order to do this.

Often the most significant asset in a bankruptcy is the bankrupt’s interest in the family home.  Whether the family home is in the sole name of the bankrupt, or in joint names, or held by a third party, is of crucial importance.  If the beneficial ownership of the property is unclear, then the court may need to determine the rights of ownership of the property according to complex trust considerations.

The Insolvency Act 1986, which governs this area, provides that the interests of the bankrupt’s creditors outweigh all other considerations unless the circumstances of the case are exceptional, which means that an order for the sale of the family home, unless the spouse can buy out the bankrupt’s share, is almost inevitable.

The bankruptcy procedure can be used as a fraudulent means to defeat a spouse’s claims on divorce, and a spouse may be able to apply to the court to annul the bankruptcy order or to ask the court to consider the bankruptcy within the financial remedy proceedings on divorce.

Although there may be little point in obtaining lump sum or property adjustment orders against a bankrupt: as his capital assets vest automatically in the trustee in bankruptcy, the family court can make maintenance orders against a bankrupt and those orders, and any maintenance arrears which have accrued, survive the bankruptcy.

This is an extremely complicated area of the law. Hughes Fowler Carruthers acted in the leading case of Arif v Anwar and our extensive experience in this area means that we can provide expert advice.