News & Publications
How does bankruptcy affect joint ownership of property, divorce, separation and cohabitees?
Although a bankruptcy order is personal to the bankrupt, if you are legally connected to the bankrupt either through marriage or joint legal ownership then the tidal effects of the bankruptcy will affect you. How it affects you will depend on a number of factors and this article intends to give a little clarity on a complex area of the law.
Bankruptcy order prior to separation or divorce
At the point a bankruptcy order is made all the assets held by the bankrupt vest in the trustee in bankruptcy, who is under a duty to call in those assets and use the proceeds to discharge as much of the bankrupt’s debts as possible.
If you reside in the property owned by the bankrupt in his or her sole name then that property will need to be sold and the full proceeds paid to the trustee. You will have the option to buy out the full share of the bankrupt and it is possible to negotiate the sum payable.
If the property is jointly owned then, in the absence of any agreement to the contrary, there shall be a presumption that the property is held equally and the bankrupt’s share will need to be paid to the trustee.
Following agreement of the sum payable, the trustee will sell to the other spouse the bankrupt’s beneficial interest. The bankrupt will however continue to remain a legal owner of the property. For the other spouse to protect themselves fully, they should arrange for the property and the mortgage to be transferred into their sole name. This will require the agreement of the bankrupt and the mortgage company.
If they fail to do this, and the bankrupt remains on the title deeds, then his or her beneficial interest starts to accrue again from the date of settlement to the trustee. If the bankrupt refuses to agree to the transfer into the other spouse’s sole name, they are able to make an application to the Court for a Judge to order the transfer.
Bankruptcy order during separation or divorce
From the point a bankruptcy petition is presented to the bankruptcy Court, the family Court is likely to stay the family proceedings generally; pending the resolution of the bankruptcy proceedings and subsequent discharge of the bankruptcy order.
Upon presenting of a bankruptcy petition, the trustee in bankruptcy has the right to place a restriction on any property held by the bankrupt until their interest has been considered first. Effectively the bankrupt’s estate is frozen and the non-bankrupt spouse or co-owner is relegated to secondary position after the trustee.
Bankruptcy order after divorce settlement
If a risk of bankruptcy is known then there can be some merit in pressing through a financial settlement, either by agreement or order of the Court before presentation of the petition.
However, the trustee in bankruptcy may have the right to set aside the agreement or order under S. 339 – 340 of the IA 1986 if the trustee is able to show that at the “relevant time” the bankrupt gave property or asset at an undervalue or gave preference to any particular creditor. The “relevant time” covers the period of five years preceding the date the bankruptcy petition is issued, with the exception that if it can be proved that at the time of the transfer the bankrupt was solvent then the time period is limited to two years preceding date of petition.
The above provisions clearly place at risk any bona fide agreement or order concluded by separating co-owners or spouses within 5 years of a bankruptcy petition. It may or not be reasonably foreseeable at the time of settlement whether the other spouse is at risk of a bankruptcy in the next 5 years. However it is possible to put in place certain safeguarding provisions at the time of settlement.
Firstly, a clause can be drafted into any agreement to confirm that each party to the settlement is solvent. If this clause is not in the order or agreement, then the financial disclosure made at the time of the settlement or order should be sufficient to prove that each party was solvent at that time. This will reduce the risk period to the two years prior to the petition.
Secondly, the agreement or order should clearly set out all provisions of the settlement so that a fair determination can be made as to whether the transaction was at undervalue.
Annulling the bankruptcy order
Under s.282 of the IA 1986, the Court has the power to annul or cancel the bankruptcy order if it can be prove on the facts that the order ought not to have been made.
In the case of F V F  1 FLR 359, Thorpe J annulled the bankruptcy order on the grounds that the husband had deliberately sought a bankruptcy order to avoid paying a maintenance order, and as he had failed to disclose in the bankruptcy proceedings the existence of European assets, which if included would show that he was indeed solvent and not bankrupt.
The grounds are subjective and based on the issues in the case, and whether it can be proved in all the circumstances of the case that the bankruptcy order should not have been made.
The non-bankrupt spouse as a creditor
If the non-bankrupt spouse is owed money by the bankrupt under a matrimonial order, they will not be paid by the trustee under the administration of the bankruptcy; as any obligations to the family do not fall within the remit of the bankruptcy. Mercifully, the bankruptcy order will not wipe clean this debt, as it would a provable debt, and so the non-bankrupt spouse can still pursue the sum against the bankrupt after the discharge of the bankruptcy.
This provision is fairly ironic given that a spouse is able to apply for a bankruptcy order as a method of enforcement of any outstanding financial order. Clearly doing so would be counter-productive as the bankrupt’s estate would be used to pay all other provable debts and not the outstanding financial order.
The situation would be different if the non-bankrupt spouse had a provable debt due under a loan or other contractual provision.
This article is for information purposes only and is not legal advice. It should not be acted or relied upon and legal advice should be sought before applying any of the information in this article to any facts or circumstances.