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Bankruptcy and Divorce

The number of people applying for bankruptcy has increased over recent years. Bankruptcy can have serious implications where the couple have separated and they are looking to divorce.

When a person is made bankrupt, their assets no longer belong to them but transfer to a trustee in bankruptcy. This trustee is responsible for dealing with the bankrupt spouse’s assets and deciding what happens to them. Therefore all transactions relating to the bankrupt spouse’s assets must be approved by the trustee in bankruptcy.

When parties separate the assets of both are put into a pot to be divided.  As the bankrupt spouse’s assets are no longer theirs, they are not in the pot for division. Often this means less to be divided between the separating couple.

What are the effects of bankruptcy?

Property - Often the couple will own a property in joint names. The bankrupt spouse’s share passes to the trustee in bankruptcy. It is possible to transfer the property to the non-bankrupt spouse if the trustee agrees. A trustee is likely to want a reasonable market rate to have been paid for the share. If this is not possible the trustee in bankruptcy can apply to have the property sold. If the non-bankrupt spouse is living in the property, the trustee in bankruptcy is likely to allow 12 months before a sale is sought. 

Income - Any income of the bankrupt spouse also becomes the responsibility of the trustee in bankruptcy. The trustee’s role includes trying to recover as much as possible from the bankrupt to repay the debts. The trustee can take part of the bankrupt spouse’s income in certain circumstances towards paying the debts. Therefore any claim for maintenance for the former partner is unlikely to succeed. This does not include child maintenance which can still be claimed through the Child Maintenance Services. 

Savings - If the bankrupt spouse had any savings, those will also pass to the trustee in bankruptcy. Again this means that any claim for a lump sum may be more difficult as the trustee in bankruptcy is likely to use any capital to clear the bankrupt spouse’s debts.

Pensions - Pensions are often excluded from the assets dealt with by the trustee in bankruptcy, so a pension sharing order may still be possible.

What can you do about bankruptcy?

If you are concerned about your spouse’s financial position, seek advice early to try and protect your position. If prompt action is taken it may be possible to avoid a more complex situation.

It may be possible to question the validity of the bankruptcy. The court in certain circumstances can annul a bankruptcy so that any claims upon divorce can be considered.

The bankruptcy of one spouse can significantly affect the outcome of a financial settlement and will have serious implications for the non-bankrupt spouse. It is important to seek early independent legal advice where bankruptcy is a feature of the matrimonial finances.

At Cartwright King we have a team of family solicitors across the country who can assist with divorce proceedings involving assets. Please feel free to contact our team on freephone 0808 168 5550 or email and we'll call you back.

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