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Bankruptcy and family law

If there is any risk of your spouse being made bankrupt, you should expedite your agreed settlement or application for a financial order through the court. This is the only real option to avoid a share of the matrimonial assets being claimed by the trustee in bankruptcy.  However, once a trustee is appointed, they have powers to apply to the court to set aside the settlement or order if it can be proved that the transfer of a property or an asset was done at an undervalue, or was done in order to give you preferential treatment over other creditors.

Following a bankruptcy order, the assets held by the bankrupt spouse vest in the trustee in bankruptcy. The bankrupt spouse has no further legal standing on the assets until the bankruptcy order is discharged.

Generally speaking, matrimonial assets will be taken as jointly owned. Thus one half will go to the trustee unless it can be proved that there is an agreement that the bankrupt spouse held a smaller or different shareholding. This is particularly the case for the family home. If it is held in joint names then, in the absence of a provable agreement to the contrary, it will be treated as if held equally by both parties to the marriage and the trustee may be to claim one half of the net equity.

The non-bankrupt spouse may be given an option to “buy out” the bankrupt spouse’s share in the home. They will need to agree a valuation of the family home and agree allowable deductions from the sale price to give a “net equity” figure. The trustee in bankruptcy will seek one half of this figure. In the event of failure of an agreement the trustee has the power to apply for a sale of the property, with the other spouse potentially being able to seek a 12 month deferment of any sale.

There is some scope for negotiation on the figures and on the percentage entitlement. In the case of Thames Guaranty Ltd v Campbell [1985] QB 210, the non-bankrupt spouse - the wife - secured a declaration that she owned the whole of the equity and did not need to pay the trustee any sum of money by proving that she had provided the entire purchase price of the property.

There is a provision for the non-bankrupt spouse to make an application to challenge the making of the bankruptcy order by seeking to set aside the bankruptcy order. Such an application would have to be made under S 282 (1) of the Insolvency Act 1986, which gives the court the power to consider if the bankruptcy order ought not to have been made or, in cases in which the order was made and the debts of the bankruptcy have been discharged, to set aside the bankruptcy order. There are a number of critical factors that the non-bankrupt spouse would need to prove to obtain such an order. These include: whether the making of the bankruptcy order was a tactical step to avoid creditors; that the bankrupt was able to pay his debts as they fell due; and consideration as to the payment of the trustee in bankruptcy’s costs.

Bankruptcy and family law settlements are a complex integration of two separate legal areas with competing provisions. If your spouse has debts, and you fear that they may have an inability to repay the outstanding sums, you must seek urgent legal advice.

Our family law specialists have in-depth knowledge and experience of bankruptcy and family law and offer a free initial meeting for you seek advice on your particular circumstances.

NB This is a general summary of the law as at the date of creation of this page. It should not replace legal advice tailored to your specific circumstances.