At Isadore Goldman, we deal exclusively with insolvency. We understand how distressing it is when these two legal processes collide, and we’re here to provide clear and pragmatic advice on your options.
How does bankruptcy affect your spouse during divorce?
When bankruptcy and divorce happen at the same time, the two legal processes can pull in opposite directions. Divorce law aims to achieve a fair financial settlement between two individuals. Bankruptcy law exists primarily to protect creditors: the people and organisations your spouse owes money to.
The most important factor in determining your position is timing. Whether bankruptcy comes before or after your financial proceedings are concluded can significantly affect what you’re entitled to and how quickly you can receive it. Our article on how to declare yourself bankrupt provides background on the process itself, if that’s helpful context.
What happens if your spouse goes bankrupt before divorce is finalised?
If your spouse is declared bankrupt before the family court finalises a financial order, a Trustee in Bankruptcy (TiB) is appointed to take control of your spouse’s assets. From that point, the TiB acts in the interests of creditors, not yours.
Under section 284 of the Insolvency Act 1986, any disposal of assets made after a bankruptcy petition is presented but before a bankruptcy order is made may be void. This means that transfers agreed between you and your spouse during this window could be unwound. As the non-bankrupt spouse, you’d find yourself at the back of the queue alongside other unsecured creditors.
What happens if bankruptcy occurs after a financial order is made?
If the family court has already made a final financial order before bankruptcy is declared, you may be in a stronger position, but you may not be fully protected.
Property transfers completed under a court order before bankruptcy may be harder for the TiB to challenge. However, any unpaid lump sum awarded to you becomes an unsecured debt in the bankruptcy estate. This means you would rank alongside other unsecured creditors and may recover only a portion of what’s owed. Existing financial settlements can only be overturned in limited circumstances, such as fraud, collusion, or deliberate concealment of assets.
How does bankruptcy affect the family home in divorce?
If the family home is jointly owned, your spouse’s share of the equity transfers to the TiB upon the making of a bankruptcy order. A restriction is then registered at HM Land Registry to protect the TiB’s interest.
The TiB cannot usually force a sale within the first year if a spouse or dependent children are living in the property. After that period, they may apply to court for an order for sale. One option open to you is to purchasethe TiB’s interest at market value. This removes the TiB from the picture, but it requires access to funds. The Gov.uk guide to bankruptcy explains how a bankrupt’s beneficial interest in property is treated in further detail.
Can a spouse deliberately go bankrupt to avoid a divorce settlement?
Courts are alert to the possibility of strategic bankruptcy. If your spouse presents a petition specifically to frustrate your financial claims, the family court has powers to investigate.
The TiB also has powers to unwind transactions at undervalue (where assets were transferred for less than their true worth) and preferences (where certain creditors were favoured). These powers can reach back several years. If you suspect your spouse has deliberately moved assets out of reach, seeking advice without delay is essential.
How does bankruptcy affect your spouse’s credit rating?
Bankruptcy only appears on the bankrupt person’s credit file. Your credit rating isn’t directly affected simply because your spouse has been declared bankrupt.
That said, any joint financial products you hold together, such as a mortgage or joint loan, create a financial association between you. This can make future joint lending more difficult, even if your individual credit file remains clean. Our article on how soon your credit score improves after bankruptcy explains what to expect over time.
What role does the trustee in bankruptcy play in divorce proceedings?
The TiB is either the official receiver or a licensed insolvency practitioner. Their role is to gather and realise your spouse’s assets for the benefit of creditors. In the context of divorce, the TiB can become involved in family court proceedings, request detailed financial information, and investigate historical asset transfers.
The TiB’s duty is to creditors, not to you and not to your spouse. Understanding this is important when considering what restrictions apply to an undischarged bankrupt throughout the bankruptcy period, and what that means for ongoing proceedings.
What is the best approach when facing divorce and bankruptcy?
The most important step you can take is to seek independent legal advice as early as possible. The timing of proceedings relative to each other can have a significant impact on your financial outcome.
Where possible, finalising a financial order before bankruptcy is declared tends to offer greater protection. It’s also worth considering whether an Individual Voluntary Arrangement (IVA) could offer an alternative route for your spouse. An IVA is a formal agreement between a debtor and their creditors to repay debts over a set period, which may be less disruptive to jointly held assets than bankruptcy.
Our solicitors can advise whether this might be appropriate in your circumstances. Citizens Advice also provides useful guidance on joint debts and belongings when a partner is bankrupt.
Frequently asked questions about divorce and bankruptcy
Does my spouse’s bankruptcy affect my assets?
Assets held solely in your name are generally protected and don’t form part of your spouse’s bankruptcy estate. Jointly owned assets, including property and joint bank accounts, may be affected. The TiB can claim your spouse’s share of any jointly held assets and may seek a court order for sale.
Can I still get a financial settlement if my spouse is bankrupt?
Yes, but your options may bemore limited. Property transfers may require TiB consent. Any unpaid lump sum becomes an unsecured debt in the bankruptcy, meaning you rank alongside other creditors and may not recover the full amount.
Should I file for divorce before or after my spouse’s bankruptcy?
There’s no single answer, as it depends on your specific circumstances. Finalising your financial order before bankruptcy is generally preferable, as it offers more protection. Taking early legal advice is the best way to identify the approach that protects your interests.
What happens to unpaid maintenance if my ex goes bankrupt?
Child maintenance obligations are not provable in bankruptcy and survive it. However, arrears of spousal maintenance (periodical payments that had already fallen due before the bankruptcy order) may become unsecured debts in the bankruptcy estate.
Can the bankruptcy trustee overturn our divorce settlement?
The TiB can challenge certain transactions in somecircumstances, including transfers at undervalue and preferences. A final court order is harder to set aside unless where fraud, concealment, or misrepresentation was involved.
How does an IVA affect divorce proceedings differently to bankruptcy?
An Individual Voluntary Arrangement (IVA) is a formal repayment agreement with creditors, typically lasting five years. Unlike bankruptcy, an IVA doesn’t automatically vest assets in a TiB, so the immediate impact on jointly held property may be less severe. However, the IVA’s terms still need to be factored into any divorce financial proceedings. Our solicitors can explain how an IVA works and whether it’s a suitable alternative.
Speak to our solicitors about divorce and bankruptcy
If you’re dealing with the intersection of divorce and bankruptcy, you do not have to face it alone. Our solicitors at Isadore Goldman deal exclusively with insolvency, and can provide honest and realistic advice tailored to your situation.
With offices in London, Norwich and Portsmouth, you can access immediate, expert advice wherever you are. To arrange an appointment, please email us at info@isadoregoldman.com