With the rising costs of living and the UK’s national debt being forecast to rise even further over the next 5 years (according to a study by the International Monetary Fund), it is no surprise that the number of adults entering insolvency in the UK is increasing. The impact of insolvency upon individuals and their families is always significant, but inevitably more so for those going through a marital breakdown.
Under the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016, creditors can apply to the court to make an individual bankrupt if they have debts of £5,000 or more, but an individual can also apply themselves. Following the presentation of a petition and the making of a bankruptcy order, a Trustee in Bankruptcy (either an Insolvency Practitioner or the Official Receiver) will be appointed, and the bankrupt individual’s estate will thereafter vest in the Trustee in Bankruptcy until such time as the bankruptcy is discharged. This is usually after 12 months but can be extended. Essentially, a bankrupt’s “estate” will comprise his or her assets and property, and the role of the Trustee is to gather, realise and distribute a bankrupt’s estate on behalf of their creditors. A bankrupt’s estate is ultimately distributed in the fixed order of secured creditors; the expenses/costs of the bankruptcy; preferential creditors; ordinary creditors and interest due, with spouses coming a firm last in the pecking order of priority.
For the non-bankrupt spouse, the situation can become a minefield and, as usual, timing is everything. In summary the primary objective of financial remedy proceedings on divorce is the fair distribution of the financial resources of divorcing spouses, whereas the primary objective of bankruptcy is the repayment of debt to creditors. These two events are not mutually exclusive, and so typically, the non-bankrupt spouse’s claims will fall directly into competition with the Trustee in Bankruptcy unless steps are taken to avoid this.
In general, a non-bankrupt spouse’s claims will only succeed in circumstances where the financial remedy proceedings have concluded before a bankruptcy order has been made, the final order has taken effect (in other words, the divorce itself has been finalised) and where they are not considered to be at an undervalue. A Trustee in Bankruptcy has the power to set aside or void any dispositions made between spouses in the period 5 years prior to the bankruptcy if considered to be at an undervalue or a sham, or otherwise during the bankruptcy period, which runs from the date of the bankruptcy order to its discharge.
Unfortunately, even though there are special provisions for the treatment of the family home, these do not exclude it from the estate of the bankrupt even if it is held in joint names, and although a period of grace or notice is given before a sale, a sale is often unavoidable if there are no other realisable assets, although interestingly if not sold within 3 years from the date of the bankruptcy the family home will re-vest in the bankrupt.
For separated and divorcing couples, navigating through the rules can be extremely difficult, risk laden and expensive, but there are some features which will assist spouses, especially where the other party’s asserted bankruptcy is tactical or disingenuous. Pension assets not in payment do not usually vest in the Trustee in Bankruptcy and will survive the process. Such assets will therefore remain available to the non-bankrupt spouse against which to make a financial remedy claim, as does part of the bankrupt’s income during the bankruptcy in certain circumstances and after its discharge. A non-bankrupt spouse can also challenge the bankruptcy order by application to annul if they can prove that the bankrupt spouse was able to pay their debts as they fell due, or, by application to rescind in exceptional circumstances.
Time is usually of the essence so the lesson here is seek legal advice sooner rather than later.
