Divorce And Bankruptcy 28th, June , 2021

bankruptcy during divorce can present issues

Lockdown has produced financial winners and losers.

Some people have worked during the pandemic or have been on furlough throughout. Because of less opportunity to spend they will have accumulated money.

For others, particularly the self-employed, the virus has been a financial disaster. Loss of work and loss of jobs for those who have ‘slipped through the cracks’ and not received any Government support has meant financial meltdown.

Despite the large number of people who are suffering financial hardship there has not been the surge of bankruptcies that might normally be expected. There are a number of reasons for this, some political, but mostly practical as until recently the courts have only been functioning partially.

Now as (fingers crossed) the worst of the Pandemic is behind us and, looking ahead as the furlough schemes wind up and bounce back loans have to be repaid, it seems very likely that the number of bankruptcies will soar.

But what effect does bankruptcy have on divorce?

Either spouse could become bankrupt before separation, during negotiations or after the divorce. When the award of sequestration ( the Scottish word for bankruptcy) is made everything the bankrupt owns vests in the trustee in bankruptcy. This means ownership of everything (with some exceptions such as Pensions) passes to the trustee. The trustee then sells all the assets identified to pay off the monies that are owed to creditors.

So bankruptcy can have a major effect on divorce.

Here are three important points relating to Divorce and Bankruptcy

  1. What happens to the Family Home if one spouse is made bankrupt?

    Irrespective of any agreements between spouses in relation to the family home if it is jointly owned the bankrupt’s share will vest in the trustee. The trustee is looking to realise the financial interest in the property. The trustee will want the other spouse to buy the share back but if this cannot be done he/she will want to sell the property.

    If the family home is in the bankrupt spouse’s sole name because the other spouse has occupancy rights the trustee would have to apply to the courts to have the property sold. If the house is in the sole name of the spouse who has not been made bankrupt then the trustee has no claim on the house unless the bankrupt spouse transferred their share of the property to the other spouse within the previous five years.

  2. What happens if a husband owes his former wife a sum of money following divorce, has not paid the sum and is then made bankrupt?

    In these circumstances, any money owed to the wife would be regarded in the same way as any other debt owed by the bankrupt. The wife will normally rank as an ordinary creditor and will only be paid out after preferred creditors such as the Inland Revenue.

    If there are insufficient funds to pay the wife then, as with any other creditor, despite the agreement that has been reached it will not be possible for any payment to be made.

  3. What happens if a husband who knows he is going to become bankrupt transfers his assets into his wife’s name before the bankruptcy takes place?

    If the husband makes such transfers and is made bankrupt the trustee can challenge the transfer if it was made in the five years before sequestration is granted. If the trustee’s challenge is successful, the assets that were transferred will have to be paid by the wife to the trustee.

    The only defence to this is if the transfer was made for adequate consideration or it is accepted that the transfer was a conventional gift such as a birthday or Christmas gift or if at the time of transfer the husband’s assets were greater than his debts.

These three examples show that there can be many pitfalls in a divorce action if one of the parties has been made bankrupt or is shortly to be made bankrupt.

In cases where bankruptcy is an issue, it is essential to obtain professional advice from experienced family lawyers such as Rooney Family Law.

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