How to manage a divorce when one or both parties are bankrupt

Any family lawyer will be all too familiar with the fact that financial difficulties can often lead to a divorce, and a divorce can often lead to stress and anxiety for those engaged in the process about their future financial security. But what happens when financial challenges and difficulties reach such a level that one (or both) of the parties to a broken-down marriage is facing the prospect of bankruptcy? 

In circumstances where it is human nature for the parties engaged in proceedings following a divorce to want to protect their financial security, those interests can, and very often will, rub up against interests of third-party creditors or a trustee in bankruptcy and create nauseating uncertainty for separating spouses. 

The situation is no different for ultra-high-net-worth individuals, whose asset portfolios and financial arrangements are inevitably more complex and when there may be more at stake in divorce financial proceedings. 

Proceedings for a financial remedy following to a divorce involve the Family Court exercising the distributive powers bestowed upon it pursuant to Part II of the Matrimonial Causes Act 1973. The Family Court has the power to make a Property Adjustment Order, which can require either party to a marriage to transfer to the other party (or to any child of the marriage) their interest in any property i.e. the former matrimonial home (FMH). 

It is a feature of cases up and down the land that the parties’ interest in the FMH, be it mortgaged or free from encumbrance, often constitutes the largest asset of the divorcing spouses. However, a spouse may be curtailed to an exclusive degree if, prior to the Court making a Property Adjustment Order a petition for the other spouse’s bankruptcy has been presented. The Family Court may well find itself lacking the power to make a Property Adjustment Order if bankruptcy proceedings have been presented to the Court. The bankrupt spouse’s interest in the FMH is likely to fall into their estate, and may well constitute the trustee in bankruptcy’s (appointed when a bankruptcy order is made to distribute assets to creditors) only likely means of being able to satisfy the claims of the bankrupt spouse’s creditors. Putting it another way, the legitimate claims of a bankrupt individual’s creditors in bankruptcy proceedings may well trump the legitimate claims of that individual’s spouse in divorce proceedings for a financial remedy. 

Tactical bankruptcy 
While many a spouse present to the Family Court as impecunious, pleading financial difficulty in an effort to minimise their financial exposure to their estranged spouse, it is, thankfully, a rare occurrence for a spouse to take the extreme step of applying for their own bankruptcy in a bid to defeat the other’s claims for financial provision upon a divorce. Should a situation arise then the law permits an application to annul the bankruptcy with the most common reason being that the Bankruptcy Order should not have been made in the first place. 

Not all bad news
It's not all doom and gloom for a spouse divorcing a partner who could be facing insolvency proceedings. 

Lump sums and Costs Orders: In an example, Spouse A, has been made bankrupt one year after a financial remedy award was made in Spouse B’s favour. Pursuant to the terms of that financial remedy award, Spouse A is to pay to Spouse B a lump sum of £50,000 and a £20,000 costs order six months after being made bankrupt. Spouse B would be able to present their award to the trustee in bankruptcy for their award to be included in the list of creditors owed money by Spouse A’s estate in bankruptcy. While recovery of the full amount may be uncertain on the basis that all creditors have an equal footing, the granting of a Bankruptcy Order following an award for financial remedies is not necessarily the end of the road for Spouse B. 

Pensions: Since the Welfare Form and Pensions Act 1999, approved pension arrangements are now expressly excluded from forming part of the bankrupt estate which may provide some relief to either the bankrupt or their spouse hoping to receive some benefit from the pension or any subsequent Pension Sharing Order. 

Maintenance Orders: Simply because one spouse may be facing bankruptcy does not preclude the Family Court from making an Order for periodical payments (or “maintenance” as commonly referred to). The Family Court will retain the jurisdiction to make such Orders, but that may give rise to conflict with the bankruptcy Court’s powers. These latter powers enable the bankruptcy Court to make Income Payment Orders, so that the trustee in bankruptcy can claim from the bankrupt’s estate such income during the currency of the bankruptcy to satisfy the claims of creditors. The exercise of Income Payment Orders should not interfere with the ability of the bankrupt (or their family) from meeting their “reasonable domestic needs” and, as such, it is clear that the two Courts will need to give careful consideration as to how to balance the competing interests. 

Conclusion 
Financial remedy proceedings can be complicated enough without the added stress, anxiety and the financial uncertainty that bankruptcy brings with it. The need to take expert advice as soon as possible is likely to be all the more necessary where financial strain may be one of the causes of the irretrievable breakdown of the marriage. 

Alex Curran is Family Lawyer at London law firm Payne Hicks Beach.