Guest blog: What are my rights if my spouse goes bankrupt during or after a divorce?

Divorce battles to get the share of your ex-partner’s assets that you are entitled to can be difficult and stressful at the best of times, but an ever-increasing number of personal bankruptcies reflecting the ongoing economic climate mean a whole new level of complications can be added to the process.

So what happens if your ex-partner declares themselves bankrupt during or after a divorce? How does it affect the financial rights of the person who hasn’t gone bankrupt – but nevertheless relies on income from the now bankrupt source?

The story of Scot and Michelle Young has been widely publicised in the national press as an example of a bitter divorce battle involving an ex-husband (Scot Young, a former multi-millionaire property developer) declaring he has gone bankrupt while his ex-wife Michelle struggles to prove otherwise and get the money she needs to raise her two children.

Of course, not all of us are married to millionaires but the issue of personal insolvency is all the same one, which increasing numbers of us are having to deal with…

Discovering bankruptcy

Often the first one learns of the impending bankruptcy situation is the arrival of a bailiff to take possessions from the family home.  Frequently, the wife’s husband will have been intercepting the mail, hiding the demands, and hoping “something will turn up” to avoid a total bankruptcy position.

These events inevitably lead to the break up of many marriages, but issuing divorce proceedings and seeking a financial settlement will not enable the wife to simply cut herself clear of the wreckage. 

Unfortunately her rights as a divorcing or divorced spouse take second place to the rights of the creditors, to whom the husband owes money. The husband’s estate will be vested in a trustee for bankruptcy, whose job it will be to get in the assets, sell the property, and pay out debts in proportion to the various creditors. 

Often, in less bitter divorces, and where one partner is sliding into bankruptcy, individuals may try to rapidly conclude a settlement with their other half to ensure that at least their ex-spouse (and their children) are looked after. 

However, transactions designed to favour one creditor over another are deemed a “preference” and are invalid and this extends to include ex-wives and any children.  The person who received the preference (eg the wife) has to share any money with the other creditors.  In exceptional cases it may be possible to show that the transaction was not a preference, but it is difficult. 

Property issues

If the family home is solely in the husband’s name, the wife is in a fairly desperate position.  The trustee must allow her one year’s occupation, but at the end of that time can take possession of the property to sell it in order to pay-off other debts.  In some cases the wife may be able to assert that she made a contribution to the property, and that while it was in her husband’s name, in reality he held one-half on trust for her. 

If the property was in joint names, then the wife keeps her half.  The home may still be sold in due course, but at least her half can be pulled from the wreckage.

Going forward

Anyone who has gone bankrupt can receive a level of income necessary for meeting “the reasonable domestic needs” of himself and his family.  Therefore, some maintenance for the wife and or children can be made available, even though it will be less than the prior standard of living that the family enjoyed. 

What if you suspect the bankruptcy to be a ploy?

As Michelle Young claims, you may suspect your ex-partner of deliberately understating his assets in order to appear insolvent so he can defeat his wife’s divorce claims. If the court agrees that a bankruptcy order should not be made (if you can prove that your ex-husband has hidden assets away, for example) it has the power to annul the bankruptcy order where appropriate. However, proving this can be costly and time consuming.

Alternatives

Individual voluntary arrangements are a popular alternative to bankruptcy.  In that case the wife should be a full participant. She will be involved in a three-handed negotiation with her husband and the other creditors, but it may well be a better and more certain outcome than being subject to the rigours of bankruptcy law.

It is recommended that any individual who finds themselves in this situation seeks expert advice as soon as possible, in order to try and secure the best outcome.

Henry Brookman is founding partner of Brookman Solicitors – a specialist international divorce and family law firm advising clients in the UK and throughout the world on matters such as financial and property settlements, children’s issues and international divorce.

Henry has been practising family law for over 30 years and has represented hundreds of clients in divorce proceedings. He is regarded as a leading expert on complex financial issues in divorce.
www.brookman.co.uk