Divorce settlements often involve the careful balancing and division of assets, debts, and responsibilities depending on both parties needs. But what happens when one spouse files for bankruptcy during or after divorce proceedings? Bankruptcy can have significant implications for financial settlements, asset division, and even the fairness of the outcome. This article explores how bankruptcy interacts with divorce, whether it can be used strategically, and how the non-bankrupt spouse can protect themselves.
The legal framework: Divorce and bankruptcy
The financial aspects of divorce are governed primarily by the Matrimonial Causes Act 1973. The court has broad discretion to divide matrimonial assets in a way that is “fair,” considering factors such as the needs of any children, the length of the marriage, and each spouse’s financial situation.
Bankruptcy, on the other hand, is governed by The Insolvency Act 1986. A person is declared bankrupt when they are unable to repay their debts, and their assets are taken over by a trustee to be distributed among creditors.
When these two legal worlds collide, things get complicated.
Bankruptcy during divorce proceedings
If one spouse files for bankruptcy during divorce proceedings, the family court must take this into account when deciding the financial settlement. Once a bankruptcy order is made, the bankrupt’s assets are transferred to the trustee in bankruptcy. This means the family court cannot deal with those assets directly, as they are now under the control of the bankruptcy process.
Key consequences include:
- Limited asset pool: The bankrupt spouse’s assets no longer belong to them and cannot be freely divided by the family court.
- Impact on the non-bankrupt spouse: If, for example, the family home is jointly owned, the trustee in bankruptcy can apply to sell the home to pay off debts—even if children live there.
This significantly reduces the options available to the court and may lead to an unfair outcome for the non-bankrupt spouse and children.
Can bankruptcy be used as a tactic?
In some cases, a spouse might declare bankruptcy to avoid paying a financial settlement or to reduce their obligations. This is not an uncommon concern, especially in contentious divorces.
However, the courts are aware of such tactics and have some tools to respond:
- Setting aside transactions: Under the Insolvency Act, the court can reverse any transaction made at an undervalue (e.g., transferring property to avoid creditors or a spouse) in the five years before bankruptcy.
- Consideration of intent: If there is evidence that bankruptcy was filed solely to frustrate the divorce settlement, the court can take this into account.
That said, bankruptcy does reduce the available resources for settlement. Even if motivated by bad faith, the practical effect is often still that the non-bankrupt spouse receives less.
Jointly owned assets and risks to the non-bankrupt spouse
When couples share jointly owned property or debt, bankruptcy can place the non-bankrupt spouse in a difficult position.
If the family home is jointly owned, the trustee in bankruptcy can usually apply to sell the property. The non-bankrupt spouse may be able to negotiate to buy out the trustee’s interest, but this can be financially burdensome. The court may grant up to one year’s delay in enforcement if children are involved, but eventually the trustee’s rights generally prevail.
Bankruptcy only absolves the bankrupt of their responsibility for certain debts—not the other spouse. If both names are on a loan or mortgage, the creditor can pursue the non-bankrupt spouse for the full amount.
Couples going through divorce should carefully review and, where possible, separate their financial liabilities to prevent unintended consequences.
Bankruptcy after divorce settlement
If bankruptcy occurs after a divorce settlement is finalised, the impact depends on the nature of the settlement:
- Lump sum or property transfer orders: These are typically provable debts in bankruptcy. If the order requires a spouse to pay a lump sum or transfer property, and they go bankrupt before fulfilling this, the non-bankrupt spouse may end up as an unsecured creditor.
- Spousal and child maintenance: These are not usually discharged in bankruptcy and remain payable. They take priority over other unsecured debts.
In short, bankruptcy after settlement may render some orders unenforceable, leaving the non-bankrupt spouse with less than originally awarded.
Should you seek a different type of settlement if bankruptcy is likely?
If there is a reasonable concern that one spouse may become bankrupt during or shortly after the divorce, the other spouse should take proactive steps:
- Secured orders: If possible, ask the court to secure payments against specific assets or make orders that are less vulnerable to bankruptcy, such as ongoing spousal maintenance rather than lump sums.
- Consent orders with protective provisions: These can include clauses that anticipate the possibility of bankruptcy and specify remedies.
- Immediate transfers: Where safe to do so, it may be preferable to transfer assets quickly (before bankruptcy) under a properly approved court order, though this must be done with legal advice to avoid clawbacks by the trustee.
Preventive measures for the non-bankrupt spouse
To protect their interests, the non-bankrupt spouse should:
- Seek early legal advice: A solicitor experienced in both family and insolvency law can help structure a more resilient settlement.
- Conduct financial disclosure diligently: If a spouse is hiding debts or planning bankruptcy, thorough disclosure may reveal warning signs.
- Monitor bankruptcy status: The Insolvency Register is public. If bankruptcy is filed, prompt action may preserve some rights.
- Consider a post-nuptial agreement: For those not yet divorced, a post-nuptial agreement can help ring-fence assets in case of future bankruptcy.
Bankruptcy can severely disrupt divorce proceedings and settlements, affecting both parties—particularly the one not filing. While it can sometimes be used strategically, courts have limited but meaningful powers to respond to bad faith bankruptcies. Still, the practical implications for the division of assets and enforcement of financial orders are real and significant.
For spouses concerned about potential bankruptcy—before, during, or after divorce—it is vital to structure settlements with care. Legal advice and proactive planning can make the difference between a fair outcome and substantial financial loss.
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