My spouse is going bankrupt. Will it affect my divorce?

Lisa Pepper

Divorce and Bankruptcy

In 2022, more than 1 in 10 businesses reported a moderate-to-severe risk of insolvency. More than one in five (22%) of businesses said energy prices were their main concern, an increase from 15% in 2021. In SMEs with 10 to 49 employees, the figure was significantly higher at 30%.

Individual bankruptcy is up too. According to government figures, 5% more bankruptcies were registered in May 2023 than in May 2022.

Bankruptcy is known to be a stressful experience. Similarly, going through a divorce can be just as emotionally taxing, causing substantial upheaval in someone’s personal life.

What happens when these situations coincide? Below, we outline the impact that bankruptcy has on divorce proceedings and the issues that can occur as a result.

How does bankruptcy affect my spouse?

When a marriage breaks down, the assets of you and your ex form the pot of matrimonial assets. The pot is divided between you as part of the divorce financial settlement.

However, if your spouse is bankrupt, the Trustee in Bankruptcy takes control of their assets. The Trustee will decide what to do with the assets and may sell them to pay your ex’s debts. The assets no longer belong to the bankrupt person, your spouse.

This is likely to reduce your financial settlement as the pot of matrimonial assets is left much smaller.

What happens if one person is declared bankrupt during a divorce?

What happens with regard to the financial settlement depends on when the bankruptcy petition is filed.

Before a bankruptcy petition is filed, the financial settlement negotiations continue in the usual way. Both you and your ex must disclose your assets and  incomes  in detail on Form E, along with a list of all your debts. You should attempt to reach a financial settlement amicably with your spouse, and have it written into a Financial Remedy Order, approved by the court, to make it legally watertight.  It is a document that a Trustee in Bankruptcy may wish to see later on and therefore you must be careful that is it not so skewed in the solvent spouse’s favour to appear to be designed to defeat the claims of creditors in a future bankruptcy.  You will need legal advice on the order before it is sent to court for approval.

If you cannot reach an agreement, the Court has the power to decide how the family finances should be split – you would need to make an application to the court to start that procedure.

Orders made by the Court will be binding on a Trustee in Bankruptcy if your ex is made bankrupt in the future, as long as the Final Order in the divorce  (previously called a Decree Absolute) has been pronounced and as long as the Trustee does not object on the basis that it appears designed to frustrate the other creditors.

However, while the process for reaching a financial settlement is the same, the outcome may not be. Debt repayments will need to be taken into account when deciding what is a fair financial split between you. This can reduce the amount of money that is available for a lump-sum payment or ongoing spousal maintenance, for example.

What is the impact of a bankruptcy order?

Once the bankruptcy order is made, it is more difficult to reach an agreement about the division of the assets. The court can no longer order your ex to transfer assets to you as they are now under the control of the bankruptcy trustee.  This means it will be much harder for you to get any lump sum or maintenance payments.

Sometimes, an ex can  declare bankruptcy with the sole intention of reducing their spouse’s financial claim. In such cases, it is important that the non-bankrupt spouse gets urgent legal advice about their options.

You should attempt to reach a financial settlement as soon as you get wind of a possible bankruptcy. Your solicitor can help you obtain the Financial Remedy Order to make the agreement waterproof so the Trustee in Bankruptcy is less able to challenge it once the bankruptcy takes effect.

What happens to the family house?

Where the family home is owned jointly, it is common for one party to receive all or a share of the other’s interest in the property as part of the financial settlement.

However, if one spouse is made bankrupt, then the house cannot be transferred into the other spouse’s name without the consent of the Trustee in Bankruptcy. The Trustee is only likely to give consent if the spouse is buying the bankrupt’s share at its full market value.

The Trustee can also take money from any sale of the house. However, they can’t usually sell the house as long as you continue to live there and pay the mortgage payments.

What happens about pensions?

In most cases, the Trustee in Bankruptcy will not take control of the bankrupt person’s pension but it may be possible for them to seek any pension lump sum.

This means that you should still be able to put pension sharing arrangements in place even when your ex is bankrupt.

What about bankruptcy after a divorce settlement?

Bankruptcy has the potential to disrupt matters even after the divorce is finalised and you have a financial settlement in place. For example, if you have agreed lump-sum payments that haven’t been paid yet, and your ex declares bankruptcy, you will have to claim the payments from the Trustee in Bankruptcy alongside all the other creditors.

Usually, a bankrupt person will be discharged from their debts automatically one year after the commencement of the bankruptcy. However, the court has discretion on whether or not to release a discharged bankrupt from a debt arising from a family order. In the case of Hayes v Hayes (2012), which dealt with a husband and wife in divorce and financial settlement proceedings, the judge decided it was inappropriate to discharge a divorce-related debt.

In this case, the Judge considered it the default position that financial remedy orders had to survive the discharge of a bankrupt to achieve a fair outcome. So even if your ex owes you money that hasn’t been paid yet, you may still be able to claim those payments once the bankruptcy has run its course.

Talk to our expert family law solicitors

The issue of bankruptcy and divorce is complex and the outcome is significantly impacted by  when the bankruptcy petition is filed.

If you are contemplating divorce and believe that your spouse may have money trouble, it’s advisable to consult a specialist family lawyer as soon as possible. Swift action can make the difference between a fair financial settlement and one that is more difficult to negotiate and enforce.

Go to our divorce pages for more information on how we can assist you in your divorce. You can also look through our family law pages to see all our other services. To speak with one of our divorce solicitors, contact us by:

• Filling in our online enquiry form; or
• Calling us on 020 4502 8767