Recent figures tell us that 42% of marriages in the UK end in divorce (ONS, Feb 2024). Prior to the introduction of no-fault divorces in April of 2022, one of the most common issues cited in divorce petitions was financial problems and disagreements within a marriage.
It’s no wonder then, that insolvency and divorce often combine, which brings a whole new set of complications alongside the emotional upheaval from getting divorced. When divorce and bankruptcy happen at the same time there can be a conflict, with bankruptcy focused on creditors as a general body, whilst the divorce requires a financial settlement with your spouse.
Bankruptcy is a legal process through which people who cannot repay debts may seek relief from some or all of their debts. Debtors can apply for bankruptcy themselves. Alternatively, creditors may seek a bankruptcy order, or an Insolvency Practitioner may present a bankruptcy petition if the terms of an Individual Voluntary Agreement (IVA) have been breached. Whatever the situation, bankruptcy still has an impact when it comes to divorce.
The trustee in bankruptcy has a responsibility to the creditors involved and must deal with all assets and income with the creditors in mind. Taking this into account, the timing of bankruptcy and divorce proceedings is key. The position in relation to finances will largely depend on when the bankruptcy petition has been filed.
What happens when one party is adjudged bankrupt (or a petition is presented) before the divorce is finalised?
When any type of asset (such as the family home) is jointly owned by a divorcing couple and one of the parties has been declared bankrupt, the trustee in bankruptcy of the bankruptcy must consent to a transfer of that property as part of any financial settlement in the divorce proceedings.
If a bankruptcy petition is presented to the court before any financial order is made by the family court, then any disposition of the bankrupt’s estate may be void under section 284 of the Insolvency Act 1986.
Where a spouse makes themselves bankrupt to seek to avoid such a financial settlement order being made, the bankruptcy court may, upon the application of say the non-bankrupt spouse, annul the bankruptcy.
What happens when the divorce is finalised before a bankruptcy of one of the parties?
Before a bankruptcy petition is presented to the court, the family court may make the order it sees fit as to the finances of a divorcing couple.
If a party is subject to a bankruptcy order after the divorce has been finalised, lump sum payments can be affected. If these debts are unpaid, they can be proved in the bankruptcy but unlike other debts, the spouse is not released from this debt if they are not paid when they are discharged from bankruptcy.
A financial settlement order made by the family court can usually only be subsequently overturned by the bankruptcy court (if one of the parties is later declared bankrupt) where there is fraud, collusion, misrepresentation or mistake.
What is the best approach?
All circumstances will differ, and consideration needs to be given to individual cases based on the specific circumstances. It is important to take early advice if these issues may affect you one way or the other.