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Bankruptcy & divorce settlements

Advice on how bankruptcy affects divorce settlements

Bankruptcy in divorce

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When a marriage breaks down, the assets of each party form the pot of matrimonial assets that are divided between them, as part of the financial settlement. But what if one party is bankrupt? In bankruptcy, almost all of the assets of the bankrupt person are no longer theirs. They are owned instead by the Trustee in Bankruptcy. This is likely to have serious implications for the bankrupt’s spouse, as the pot of matrimonial assets is potentially left much smaller.

In a case where the matrimonial home is owned jointly by the bankrupt and his or her spouse, the house cannot be transferred into the spouse’s sole name without the consent of the Trustee in Bankruptcy. This is likely only to be given if the spouse can buy the bankrupt’s share at a reasonable market value.

As the income and any savings will be controled by the Trustee in bankruptcy any lump sum or maintenance payments are unlikely to be forthcoming.

The effects of bankruptcy can be so serious that some people choose to make themselves bankrupt in order to frustrate or delay their spouse’s claims in relation to the financial settlement.

Ideally you need to try and agree financial matters before the bankruptcy starts ie when bankruptcy is first mentioned. Swift action and an application prepared by your solicitor may allow appropriate orders for financial settlement to be made before a bankruptcy takes effect.

Even if the bankruptcy is already in effect, the bankrupt’s spouse may be able to apply to the court to annul the bankruptcy if the bankrupt is not, in fact, insolvent.

In some cases, bankruptcy can work in the other spouse’s favour. Until recently, a person owed money as part of a divorce settlement could apply to make their former spouse bankrupt, but could not have that debt proved in that bankruptcy. But in 2005, the law changed to allow such a debt, plus an award of costs in family proceedings, to be paid by the bankrupt as part of his bankruptcy.

Bankruptcy can still have serious implications for the financial settlement on divorce, and legal advice should always be sought in circumstances where the bankruptcy of one of the parties is a real or possible risk.

Contact Woolley & Co for specialist advice on bankruptcy and divorce.

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