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How will a potential bankruptcy be treated in my divorce?

8th August 2024 by Damian Summerscales

Categories: What's New?
Tags: bankrupt, bankruptcy, divorce

In the year ending 30 April 2024, one in 463 adults in England and Wales entered insolvency. Financial pressures can often be a factor in relationship breakdown, and a potential bankruptcy adds another layer of complication to the stress of going through a divorce or dissolution of a civil partnership.

‘If you are contemplating a divorce, and you have serious financial worries about your ex-partner – so much so that bankruptcy could be on the cards – you would be wise to take legal advice as soon as possible,’ says Damian Summerscales, head of family law at Laceys Solicitors. ‘It is an issue that can have a real impact on the outcome of your divorce and how matrimonial assets are split, especially the question of timing, and so must be handled with care and expertise.’ Damian continues.

How is bankruptcy factored into a divorce?

If your ex-partner is contemplating bankruptcy, or has already initiated the process, then this will be an important and relevant factor in what share of assets you receive from the divorce.

When someone is declared bankrupt, a trustee in bankruptcy is appointed and their job is to gather the insolvent person’s assets and use them to settle their debts. You could, therefore, find that you are competing with your ex-partner’s creditors and in conflict with the trustee in bankruptcy over what should happen with particular assets. Inevitably, your objectives from the divorce and that of the trustee in bankruptcy will rarely align.

Despite this, it is important to remember that the trustee in bankruptcy would have no rights over assets you legally own in your sole name and would only be in control of your ex-partner’s assets. However, joint assets such as bank accounts, investments and even a share of your jointly owned property can be at risk. If the majority of the matrimonial assets are in your ex-partner’s name, or in joint names, then a bankruptcy could significantly diminish the pool of assets available to divide between you.

What will happen to our home?

The family home often represents a large piece of the pot to be divided, and bankruptcy can complicate the various options.  A lot depends on whose name the property is in.

If it is in your sole name, then it is likely not to be captured by the bankruptcy process and will remain out of reach of the trustee in bankruptcy.

If it is in joint names with your ex-partner, the trustee in bankruptcy will typically only gain control of your ex-partner’s share.  A note of caution here, as the trustee may look to have a jointly owned family home sold, for example in circumstances where you would be unable to buy out your ex-partner’s share.

If it is in your ex-partner’s sole name, it is likely that the trustee will seek to sell it and use the proceeds to discharge your ex-partner’s debts. This could mean that you would not get anything from the family home once all creditors are paid. However, there are exceptional situations where the family court will consider delaying a sale of the family home, such as:

• where you have young children living in the home, who would face significant disruption if made to move; or
• where you are able to demonstrate to the court that you would face exceptional hardship if forced to leave the home.

Timing of decisions

Whilst not always possible when navigating an emotionally taxing separation, it is important to try to maintain open communications.

If your ex-partner is declared bankrupt before the divorce settlement is finalised, the court will have limited powers to allocate assets to you as it might have done otherwise. More often than not, this will leave you with a less favourable outcome than you had hoped for.

Conversely, if your ex-partner is declared bankrupt after your divorce settlement is finalised, you might face challenges in enforcing certain orders against them for payments, or lump sum payments, as you will be added to the bottom of their list of creditors. However, it might keep assets, such as the family home, out of the trustee’s reach.

Generally, if there is scope to separate your finances from your ex-partner’s before bankruptcy and divorce commence, this should be explored.  It might also be possible to agree with your ex-partner for assets, such as the family home, to be sold in advance of the divorce settlement, to secure your housing needs and the needs of any young children.

Key considerations

Understanding the potential impact of bankruptcy on your divorce will empower you to navigate a complex situation more effectively. We will guide you through the key considerations:

• Timing is critical – when to separate, divorce and apply for bankruptcy should be carefully considered in advance of any decisions being taken.
• Expert legal advice – is needed as both divorce and bankruptcy are complex legal matters, and our solicitors will help you to better understand your rights and options.
• Transparency is best – open communication with your ex-partner and legal advisors is always a good idea, as early discussions allow for a more realistic approach, particularly when it comes to your family home.

How we can help

While bankruptcy does not necessarily derail a divorce, it introduces an added layer of complexity and uncertainty into your life.  Seeking legal advice at the earliest opportunity will answer those burning questions and put your mind at ease about the best way forward.

Please contact our Family department on 01202 377800 or email d.summerscales@laceyssolicitors.co.uk for further advice. 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.