How to deal with insolvency in divorce proceedings

In the UK there are two legal definitions of insolvency. The first is where an individual or business owes more than it owns and the second is when they are unable to pay their debts as they fall due.

Insolvency, and the threat of insolvency, brings with it some particular issues which requires careful consideration when dealing with matrimonial proceedings.

When divorce proceedings have been issued the court has significant powers to deal with the matrimonial finances. The court is not constrained by legal or beneficial ownership of the assets but will take all assets into account whether they are jointly or solely owned and primarily is looking to identify the matrimonial assets. 

Debts are also taken into account and those built up during the course of the marriage generally considered to be matrimonial debts regardless of whether they are in sole or joint names. That said, whilst the court can take the existence of these debts into account in pursuit of a fair outcome, they can not make an order requiring the creditor to release a debtor from the debt.

In the majority of cases, a family’s debt is manageable. It limits the assets available for sharing but an agreement can often be reached which ensures that both parties have a roof over their heads and able to service the debt going forwards. However, sometimes, the amount of debt is significant and there is no clear way for the debt to be paid. 

There may already be IVA’s or CCJ’s in place or and bankruptcy may have been highlighted as a potential issue. Finances which may have been tight before separation can become complexly overwhelming on separation when it becomes necessary to maintain two households in place of one.

Bankruptcy petitions

What happens with regards to the finances depends largely on whether and when a bankruptcy petition has been filed. Prior to a bankruptcy petition being filed, the court retains its full power and discretion with regards to finances on divorce. 

The debts need to be taken into account and consideration should be given to options such as negotiating a reduced lump sum towards a debt or instalments. Thought should also be given to the position if a party is made bankrupt. This is particularly the case if the debt is in one party’s name and is more than the value of the assets in their name or joint names. Sometimes, bankruptcy is the best option as it addresses the debt whilst preserving what is left of the matrimonial assets.

Ideally, an agreement will be reached as to a division of the assets but in default the court will make an order. This can result in an unequal division of the matrimonial assets if, for example, it is necessary to meet needs. If that order provides for a property to be transferred to a spouse either outright or on the basis that it will be subject to a chargeback payable at some point in the future, that order will take effect upon Decree Absolute.

So long as no bankruptcy petition is filed before the Decree Absolute, the order will be binding even if the property has not yet been transferred. If the spouse transferring their interest is subsequently adjudged bankrupt the trustee in bankruptcy is also bound by the order. This will be subject to their ability to apply to set it aside as a transaction at an undervalue (which given that is in settlement of all matrimonial claims will be difficult).

An important point to note through is to be aware that if the court order provides for a property to be held in joint names and sold at a future date, rather than a transfer now with a charge back securing payment at a later date, this can cause a problem on subsequent bankruptcy. 

This is because the trustee can and will seek to realise that interest as soon as they can and a spouse living in the home with children can postpone a sale up to a year unless special circumstances exist.

In the event that a bankruptcy petition is filed before Decree Absolute is pronounced by the court, then the entirety of the bankrupt’s estate will vest in the trustee in bankruptcy and the court is then unable to make a property adjustment order without the validation of the bankruptcy court (which is unlikely). 

In practical terms, this will mean that unless it is possible to show that the spouse who has been adjudged bankrupt is not actually insolvent and apply to annul the bankruptcy order, instead of negotiating with the bankrupt spouse, it will be necessary to negotiate with the trustee in bankruptcy. In that situation the considerations as to property ownership are governed more strictly and without the board discretion available to the family court on divorce.

Subsequent bankruptcy can also cause issues with regards to lump sum payments which have yet to be paid. Whilst these are debts that can be sought through the bankruptcy, unlike other debts, the spouse is not released if they remain unpaid when they are discharged from bankruptcy.  

Other orders which are made in matrimonial proceedings include pension sharing or attachments orders which are not affected by bankruptcy and maintenance which whilst not impacted directly by bankruptcy, a payers ability to pay can be restricted if they are required to pay an element of income to the creditors.

Issues such as these underline the necessity of securing legal advice specific to your circumstances. Our team of divorce lawyers are specialists in this field and work exclusively on family and divorce law matters. If you would like more information or a chat about how I can help you, I can be contacted on 01206 217305 or emailed karen.johnson@birkettlong.co.uk.